Dissolution of co-ownership: the Supreme Court continues to favor its taxation.

Shared ownership of real estate is a common form of property holding, particularly in cases of inheritances or donations equally distributed among the heirs of the decedent or joint purchases by spouses. Although there is no specific tax concept that defines the notion of a co-ownership community, we refer to the civil code for its definition, which has been further developed through court analysis and rulings.

This co-ownership, as its name suggests, involves a community of several individuals who share a right or ownership in undivided shares. It often leads to disputes among co-owners, which may result in the desire to dissolve this co-ownership. However, beyond reaching an agreement on who will retain the property and how to compensate those giving up their proportional share, the dissolution of co-ownership can have tax implications. These include the Personal Income Tax (hereinafter, "IRPF"), the Inheritance and Gift Tax (hereinafter, "ISD"), and the Property Transfer Tax (hereinafter, "ITP") in its modalities of Transfer of Assets for Value (hereinafter, "TPO") and Documented Legal Acts (hereinafter, "AJD"). These implications further complicate the agreement among co-owners seeking to dissolve the co-ownership.

In this article, we will analyze indirect taxation, specifically the impact on the Property Transfer Tax (ITP), in cases where the dissolution of co-ownership involves real estate with compensated excess adjudication. This refers to situations where each member of the co-ownership community receives an asset of equal value to their share of participation in the community. Indirect taxation plays a significant role in the dissolution of co-ownership since, generally speaking, if there are no excess adjudications or these are compensated in ways accepted by case law, the dissolution will be subject to Documented Legal Acts (AJD) at a rate of 1.5%. However, if there is an excess or the transaction is classified as an exchange, the application of Transfer of Assets for Value (TPO) entails a tax rate of 10%.

In its ruling 3480/2019, the Supreme Court established the criterion that multiple communities can be dissolved simultaneously and collectively. In these cases, if the complete dissolution of co-ownerships involving indivisible assets occurs, where there is an excess adjudication but it is compensated by the adjudication of another indivisible asset from another community with the same co-owners—acting as a balancing element—such dissolutions will be subject to the gradual AJD rate and not the TPO rate. This ruling began to shed light on the taxation of co-ownership dissolutions. Furthermore, the Supreme Court, through its recent rulings 731/2024 and 719/2024, issued on the 26th and 30th of 2024, has further clarified matters related to indirect taxation arising from the dissolution of co-ownerships without excess adjudications.

The Supreme Court has established as doctrine that co-ownership dissolutions without excess adjudication, where the assets forming the co-ownership were acquired through different legal transactions—such as one through inheritance and another through purchase—will be subject to the Property Transfer Tax (ITP) under the Documented Legal Acts (AJD) modality rather than the Transfer of Assets for Value (TPO) modality. This represents a tax saving for the taxpayer. This taxation is applicable because the Court acknowledges the irrelevance of the origin of the assets and rights involved in the dissolution of co-ownership.

Analyzing the case of two siblings who maintain equal shares in the successive acquisition (via purchase, inheritance, or donations) of various assets forming their common estate, they decide to dissolve the co-ownership by adjudicating assets of equal value belonging to them through different acquisition titles. Upon the dissolution of the co-ownership of several indivisible assets, both co-owners receive assets that maintain the value of their participation quota in the co-ownership.

In line with its 2019 ruling, the Supreme Court clarified in its recent judgments:

"In this respect, it is also permissible to create equivalent and proportional lots to be allocated to each co-owner according to their shareholding, in which case it is irrelevant whether the assets are divisible or indivisible, as the key element is that the lots are equivalent and proportional to the co-owners' shares."

This highlights the critical importance of avoiding any imbalance in the form of excess or deficit adjudications between co-owners, ensuring these are compensated by any of the accepted methods.

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These recent rulings, clearly aligned with the Supreme Court’s 2019 decision, establish as an interpretative criterion the fiscal irrelevance of the origin of the assets adjudicated in the dissolution of co-ownership. The focus lies on the legal transaction aiming at dividing the common property, specifying the rights held by the co-owner transferring their participation shares and receiving another share from a different co-ownership involving the same co-owners.

The Court emphasizes that, in cases where there is no benefit or capital gain for the co-owners, the operation will be taxed under the Documented Legal Acts (AJD) modality rather than the Transfer of Assets for Value (TPO) modality.