A legal Q & A
What does buying and owning property in the Canary Islands entail from a legal point of view? Here we answer the most common questions you are bound to be asking as a prospective property buyer.
Please keep in mind that while we do our best to ensure that this guide is as accurate as possible, it is intended for information purposes only. We cannot stress enough the importance of hiring a reputable local lawyer who speaks your language to look after your interests as you buy property privately in the Canary Islands, and to provide you with the best and most up-to-date legal advice.
What requirements must a foreigner satisfy in order to buy property in the Canary Islands?
There are two things that a non-resident foreigner who wants to buy property in the Canary Islands must do.
The first is to obtain a foreigner identification number, issued by the Spanish authorities and known as a N.I.E. number. The second step is to open a non-resident bank account, which will be used in the property transaction and into which to transfer money from abroad. It usually makes sense to open an account with the same bank that will be funding the purchase if you plan to take out a mortgage.
Should you require, you can give a Power of Attorney to your Canarian lawyer who will then be able to carry out these two processes on your behalf.
What is the Promise of Purchase and Sale Agreement?
Once you have found a property you are satisfied with and have decided to go ahead with the deal, you will be asked to sign a Promise of Purchase and Sale Agreement with the seller.
This contract will bind both parties in writing to the agreed price of the property and to a maximum date by which the sale must take place (usually around three months later). This will take the property off the market and give you enough time to make the necessary financial arrangements, such as obtaining a mortgage, and will also give your lawyer time to check that there are no problems with the sale or the property itself from a legal point of view.
When you sign this Agreement, you, as the buyer, will be asked to pay a deposit of around 10% of the purchase price to the seller. Should you opt out from the sale for any reason that is not covered by the agreement, you will lose the deposit. On the other hand, should the seller opt out, he is usually obliged to pay you twice the deposit back as compensation.
You should ask your lawyer to review the Promise of Purchase and Sale Agreement prior to signing it to make sure you are covered in case you cannot go through with the sale for reasons that are beyond your control, such as not being granted a mortgage for example.
What should my lawyer check about the property I am going to buy?
Your lawyer will first verify the legal and financial state of the property to make sure everything is in order in this regard.
He or she will ask the Land Registry for a document called the Nota Simple that will indicate if the property has any mortgages or other outstanding charges levied against it. Your lawyer will also check with the Town Hall to find out if all local taxes are paid up and also to make sure that any modifications made to the property have the necessary planning permits.
Should the property form part of a building complex, your lawyer will also review the statute and regulations of the Community of Property Owners to make sure everything is in order and explain any potential issues to you. It is also important to find out what monthly fees you will have to pay as a property owner for the upkeep of the common parts of the property, such as stairs, lifts, swimming pools and so on, and whether there are any outstanding dues in this regard. Do keep in mind that you should have this information even before you sign the Promise of Purchase and Sale Agreement.
What goes on at the notary’s office on the day of the sale?
Prior to the meeting with the notary, your lawyer should ideally obtain a draft of the Title Deed from the notary and translate it into your own language. Once at the notary’s office, the notary will check the identities of the buyer and seller and verify that the property is free from any charges.
The Title Deed will then be read out, with your lawyer or an interpreter assisting you if necessary. This is to make sure that the terms and conditions agreed upon by both buyer and seller are reflected in the Title Deed. Once everything is clear, both parties will sign the Deed. If there is any outstanding mortgage on the property, it is cancelled at this moment, and the mortgage amount deducted from the amount of money that is owed to the seller, who is also paid at this point.
The property is now yours and either your lawyer or the notary should register the transaction with the Land Registry. This is not legally required, strictly speaking, but it is highly recommended to do so and will avoid the chance for potential problems in the future.
What does the term dinero negro or dinero ‘B’ mean?
Although the Spanish government is now starting to crack down on the practice, it is still very common that the sales price reflected in the Title Deed is lower than what the property actually costs. This is usually done in order to avoid some of the taxes that are applicable to the property transaction. The extra money that is paid to the seller over and above the registered price is called dinero negro or dinero ‘B’ in Spanish (literally meaning ‘black money’ or ‘B’ money) while the registered amount is referred to as dinero ‘A’.
What you have to keep in mind is that banks will usually calculate the maximum amount they can lend on the property based on either the registered purchase price or on the value that their surveyor puts on the property (usually whichever is lower). This means that you will usually not be able to obtain the ‘B’ money portion of the purchase price from your mortgage, but will have to fork it out yourself.
What additional costs must I take into account besides the purchase price?
A property transaction will imply fees, costs and taxes that the buyer will have to pay and which will amount to around 10% of the purchase price.
In the case of a second-hand property, you, the buyer, must pay 6.5% Property Transfer Tax. There are also notary fees that average around 300€ to 400€, and about 250€ Land Registry fees when the sale is registered.
There is also a municipal tax, called the Plusvalía, which is a Capital Gains Tax that is charged as a percentage of the increase in value of the land since the property was last sold. While the Plusvalía tax is legally the responsibility of the seller, in the Canary Islands it is customary for the buyer to agree to pay it.
Finally, if you are taking out a mortgage to help pay for the property, there will also be bank charges and expenses related to this.
What are the obligations of a foreigner who owns a property in the Canary Islands?
If you are not resident in Spain but own a property in the country, you must appoint a tax representative in Spain, who will be in charge of receiving correspondence related to the property and responsible to see that all dues are paid on time.
The taxes you will have to pay on your Spanish property include the Impuesto Sobre Bienes Imuebles or I.B.I., which is a Town Council tax calculated on the official value of the property, as well as the Basura, which is a municipal rubbish collection charge. In certain cases, if the value of your property exceeds a stipulated amount, you would also be liable to pay Wealth Tax or Patrimonio.
Besides, if you choose to rent out your property or use it for any kind of financial gain, you are obliged to file an income tax declaration in Spain and pay taxes on the income derived from the property.
Apart from these obligations, you will also have the obvious expenses such as community dues (if applicable) and utility charges such as water and electricity bills.
Can a non-resident obtain a Euro mortgage in Spain?
As long as you can satisfy the bank that you are financially stable and trustworthy, there should be no problem for a foreigner to get a mortgage in Spain.
One thing to keep in mind is that banks do tend to finance a slightly lower percentage of the purchase price or estimated value of the property in the case of non-resident foreigners compared to residents, but these values and conditions will vary from one bank to another.
Before the bank can study your mortgage application, you will be asked for your last year or two’s tax declarations in your home country, statements of your home bank accounts as well as any other relevant documents that the bank will use to determine your income and solvency. Your bank will generally also want to ensure that the monthly instalments payable on the mortgage do not exceed 30-35% of your income.
These monthly instalments are usually paid by bank transfer from an account in your home country, although the specifics of this can be discussed with the bank.