How to contribute real estate to a company and not die in the attempt

Do I buy as an individual or with a company?' This is one of the questions we receive most frequently, and we come to the conclusion that, as a general rule, from a tax point of view, it will be advisable to use a limited company when the number of properties invested in is greater.

Properties with a low acquisition value

Another question that frequently arises is what happens when the intention is to contribute real estate with a low acquisition value to a company. This is one of the main problems to be dealt with in the case of wanting to contribute real estate. Let us remember that, in this case, the individual will contribute the property to the company and the company will include the property in its assets for its value at that time, with the shareholder receiving shares or holdings in the company for the aforementioned value.

Taxation of the transaction

This transfer will be subject to personal income tax for the contributor, for the capital gain obtained, calculated on the basis of the difference between the acquisition value of the property and the market value at the time of the contribution. Likewise, the transaction will also be subject to the Tax on the Increase in Value of Urban Land (municipal capital gains tax), which will be levied on the transfer depending on the number of years the transferor has owned the property. Thus, the tax cost of the non-monetary contribution of real estate will make it unfeasible on many occasions.

When it is possible to avoid taxation

In some cases it will be possible to avoid (or rather, defer) the aforementioned taxation, and this will be in those cases in which it is possible to apply the special tax regime for mergers, spin-offs, contributions of assets, exchange of securities and change of registered office of a European Company contained in Chapter VII of the Corporate Income Tax Act.

This special tax regime will allow us, broadly speaking, to contribute the property to an existing or newly created company, the latter acquiring it at its historical cost, i.e. at the value at which it was acquired by the contributor, without accruing either personal income tax or municipal capital gains tax for the contributor. However, this is a deferral regime, which means that, for tax purposes, the company must include the property in its assets at the value at which the shareholder acquired it, which will mean lower depreciation expenses and a higher profit in the event of transfer, giving rise to tax adjustments in the company's income tax. The same will apply to the date of acquisition for municipal capital gains purposes, with the date of acquisition of the property by the shareholder having to be taken into account.

In order for the regime to apply, the property must be used for an economic activity at the time of the contribution (the property must be used for an economic activity for at least three years), with human and material resources to carry out the activity; and it should be remembered that in order to be considered as an economic activity in the case of leasing, at least one person must be employed full time to manage the activity.

To be taken into account

The regime requires compliance with a series of requirements, of which we would highlight the fact that the operation must not be aimed at tax evasion or fraud, which will be achieved when it is carried out for valid economic reasons, i.e. it does not have tax savings as its sole purpose, although in these cases the asset protection offered by the company through the limitation of liability is usually configured as a valid economic motive.

This article is not intended as an exhaustive analysis of the regime, but rather as an approximation to a possibility for restructuring assets of a certain importance.

Carlos Muñoz | Lawyer expert in Wealth Management