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Friday, 23 July 2010 00:00

Reductions in the tax bill

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Deductions for purchasing a permanent residence shall be as usual regarding income tax for the 2009 year. However, December 31, 2010 will be the last date to buy a house ensuring the most important tax exemption in IRPF (personal income tax) as it’s currently applied. As of 2011, there will be some significant tax changes.

According to the current law, deductions can be made up to 15% of the amounts paid on the purchase, renovation, construction or enlargement of the usual residence up to a maximum of 9,015 Euros. This means a maximum deduction of 1,352.28 Euros per year in the IRPF. Within this limit, both the invested capital and the interest on a mortgage loan should be included.


General reduction for houses rented as primary residence (not short-term residence or holiday residences) is 50% of the net income obtained, although 100% can be applied if the house is rented to people between 18 and 35 years, with net income from employment or independent economic activity results higher than 7,455.14 Euros.


As of January 1, 2011, if the law does not change, tax deductions will be modified regarding the usual residence purchase; only taxpayers with incomes lower than 24,107.2 Euros will be able to deduct a percentage. A deduction base of 9,015 will only be applied to incomes less than 17,700.2 Euros and, from such amount, deductions shall be progressively reduced down to 0 for those already mentioned incomes of 24.107,2 Euros. As such, all those who wish to continue enjoying the tax deduction for their primary residence have until 31st December 2010 to ensure deductions regardless of their income.

Likewise, among the next changes, there shall be a new deduction in IRPF up to 10% of the amount paid for renovation works performed in the usual residence until 31st December 2012. This deduction shall be 10% for taxpayers that have an income less than 33,007 Euros, with a limit of 4,000 Euros each year per house; additional amounts may be deducted throughout the following four years with a maximum of 12,000 Euros. This percentage shall be progressively reduced for taxpayers with incomes between 33,007 and 53,007.20 euro/year.

From 1st January, 2010 there will also be changes to capital gains taxes obtained from selling real estate properties; these will be tax-free in case of being used to buy or renovate the primary residence. In any other case, capital gains tax is 19% for the first 6,000 Euros and 21% (it used to be 18%) for the rest.


Contributions to pension plans allow some reductions in the tax bill, but always with certain limits. Taxpayers younger than 50 years old shall be entitled to deduct, as a maximum, the lesser of the following amounts: 10,000 Euros/year (12,500 Euros for those people older than 50 years old) or 30% of the net income from employment or independent economic activity received individually during the fiscal year (from 50 years old the percentage is increased to 50%).

All incomes derived from savings (investment funds, saving insurances, Stock Market profits and financial deposits, among others) will be charged on 18%.

Dividends will also have some peculiarities. Generally, the IRPF law includes an exemption for the first 1,500 Euros received. However, if this amount is exceeded, the remaining will be taxed on 18%.

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