Once the property to be acquired has been selected and the terms agreed upon with the owner, the parties may sign a preliminary agreement (commonly referred to as a “Reservation Voucher”) setting out, among other things, the price, payment terms, the initial earnest money deposit (typically 10% of the price), the deadline for executing the purchase deed, the conditions for delivery of the property, and penalties for both parties in the event of non-compliance, in order to secure the transaction and the terms verbally agreed upon by both parties.
The Reservation Voucher is, without question, the most important legal instrument in the entire transaction, as it sets out the terms of the deal. We have seen many cases in which this document is signed without notarial or legal advice, leading to significant consequences.
There are then two options for formalizing the transaction. The first is to proceed directly to a Final Purchase Agreement once the notary handling the matter approves the title and other requirements.
The second option is to sign a promise of sale, paying part of the price and taking possession of the property, until the final purchase agreement can be executed.
There are two particularly important aspects to consider when purchasing real estate: whether the property’s building plans are in order and approved by the local municipal government (Intendencia), and whether the corresponding social security contributions (BPS) for construction and renovations have been paid. These matters must be strictly verified, and coverage should be arranged in case either is not in order.
When a real estate broker is involved to facilitate the search for the property, their commission is typically 3% plus VAT.
Both the seller and the buyer must pay the Real Estate Transfer Tax (Impuesto a las Transmisiones Patrimoniales, ITP): 2% of the value set by the National Land Registry (Dirección Nacional de Catastro), adjusted for inflation (CPI).
The seller must pay Personal Income Tax (Impuesto a la Renta de las Personas Físicas, IRPF) if the sale generates a capital gain, meaning there is a positive difference between the acquisition value of the property and its subsequent sale price. If the prior title dates from after July 1, 2007, the seller must be taxed under the actual (real) method, under which the capital gain is taxed at a rate of 12%. If the prior title predates that date, the seller may apply whichever is lower between the actual method and the notional method. Under the notional method, the taxable base is 15% of the sale price, to which the 12% rate is applied — equivalent to paying 1.8% of the sale price.
In our country, it is the buyer who appoints the notary to assist with the purchase. We generally recommend that sellers also obtain their own notarial advice to protect their interests.
