The tax treatment of ending co-ownership

First, it is worth explaining what co-ownership is. In legal terms, co-ownership (condomini) refers to a situation in which two or more people share ownership of an asset. A very common example is a couple buying a home together, or two siblings inheriting a property from their father or mother.

Following that last example, one of the siblings may not want to share the property, and one of them may consider taking over the other’s undivided half. There are two options: buying the undivided half, or ending the co-ownership (extinció de condomini) by paying financial compensation to the sibling who gives up their share. There are several tax factors to consider when choosing between them, and ending the co-ownership has a number of advantages, which we explain below.

Under Article 33.2 of Act 35/2006 on Personal Income Tax, dividing jointly owned property or dissolving co-ownership does not alter the composition of a person’s assets when the compensation paid is the real value of the share acquired. Continuing our example, if the siblings valued the property at €200,000 when they handled their father’s estate, and the sibling who keeps the property pays the other €100,000 for their half, there is no capital gain and therefore no impact on income tax.

This is not the case, however, if the share is allocated for more than its acquisition value, as there is then a capital gain. So if the compensation paid is €150,000, there is an excess of €50,000, which will be treated as a capital gain and will therefore be taxed.

Furthermore, unlike a sale, ending co-ownership is not considered a transfer of assets but a change in each owner’s share, so it is not subject to Transfer Tax (Impuesto de Transmisiones Patrimoniales) or to the municipal capital gains tax (plusvalía municipal).

To sum up, ending or dissolving co-ownership is not subject to Transfer Tax or the municipal capital gains tax, nor does it affect income tax, provided the acquisition value is not updated. If it is updated and the transferring owner is compensated for more than the acquisition value, there is a capital gain and the difference between the acquisition value and the updated value will be taxed. If it is not updated, ending the co-ownership is only subject to Stamp Duty (Impuesto de Actos Jurídicos Documentados).

The parties can agree how to share the costs of the process, although they are usually split in half. In summary, the costs of ending co-ownership are:

• Notary fees
• A valuer, if the property needs to be valued
• Professional advice and handling
• Registration of the new ownership in the Land Registry

All these circumstances, and other details, need to be taken into account and assessed according to each situation in order to choose the most beneficial option.