Design Process
Taxes to be paid for the construction of a home
*Update: Please contact our team for current pricing.
In today’s article, we will address the subject of taxes to be paid for the construction of a home. The reality is that we often underestimate the costs associated with building one’s own home, starting from the base construction cost—which the builder usually adjusts downwards without including key items such as earthmoving or foundations—to VAT or registration in the property registry. The list of costs to consider beyond the project and construction is long, and although some are minimal, it is advisable to be aware of all of them to ensure the total is accounted for in our finances.
On the other hand, if you leave this work to the construction company or architectural firm you hire—at Slow Studio, we offer this management service—knowing which taxes are to be paid for the construction of a home and how much they amount to allows you to be aware of what is being charged at all times. This is an exercise in transparency in which it is beneficial to be involved so that you know exactly what you are paying for your home.
To clearly understand the entire process, we have divided it into three phases associated with taxes: the purchase of the land, the construction of the house, and the professional management of the project.
These taxes to be paid for the construction of a home are divided into a series of fees that may be standard at a national level or vary depending on the municipality in which we are located, or even according to more specific characteristics, such as expenses associated with the land acquired or the need to register services such as water or electricity with the utility companies.
Furthermore, taxes are classified as progressive or regressive, according to their relationship with the taxpayer’s income.
A progressive tax is one that increases as income increases; therefore, the agent must pay more taxes as a percentage according to the bracket in which, for example, the square meters of their home fall.
A regressive tax is one that we all pay equally, as is the case with VAT, so it affects the segments of society with lower purchasing power to a greater extent.
1 Purchase and sale of the land
Land transfer taxes
To the base price of a plot of land, we must add the land transfer tax, which varies according to the nature of the transaction.
There are two situations: one in which the land passes from one private individual to another, where the tax to be paid will be lower, and another in which a private individual purchases the land from a company.
From private individual to private individual
In the case of a transaction between private individuals, the tax to be paid is called the Property Transfer Tax, commonly known as ITP (Impuesto de Transmisiones Patrimoniales), which is paid when the purchase is formalized. In the community of Catalonia, it constitutes 10% of the total cost of the plot, as it varies by region.
This is a tax that, since 1993, has been levied on all operations involving a transfer of assets between individuals. This includes assets such as the sale of a vehicle between individuals or the sale of land, a plot, or an estate. Álava and the Basque Country are the communities that pay the least, between 2.5% and 6%.
It is a progressive tax, so the 10% rate applies as long as the actual value of the land does not exceed €1M. If it is higher, this 10% will increase to 11%. There are also certain reductions in the case of land intended for the construction of official protection housing (7%), or for the home of a large family, a young person, or a person with functional diversity (5%).
From company to private individual
ITP is a tax incompatible with VAT, so we must be aware that if we pay one, we should not be paying the other. In the event that the land is owned by a company, we will not pay ITP, as we are purchasing an asset from that company.
Such a situation occurs, for example, if a bank, city council, developer, or any owner has registered the land in the name of a company; therefore, the land becomes an asset of the company and is subject to VAT.
This Value Added Tax is indeed a regressive tax and constitutes 21% of the value of any product not considered a basic necessity.
Notary and management agency
In both cases, we will have notary and management agency costs, which are around 1-2% of the operation. We will detail them below.
Notary
Notary fees are governed by tariffs established equally throughout the State. They serve to pay the costs of granting the public deed of ownership, which is responsible for establishing that a seller wishes to transfer land to a buyer for a specific price.
According to the Civil Code, the costs of granting deeds are borne by the seller, since the land may already have deeds if it has been sold previously. From this point on, the price of the first copy and subsequent ones after the sale will be borne by the buyer, unless otherwise agreed.
Notary expenses tend to vary depending on the price of the property, the length of the deed, whether the home has annexed properties or garages, the number of owners, and the number of copies required, etc. This is determined in Royal Decree 1426/89, which establishes approximate notary expenses for each purchase value.
As an example, for a plot of land with a cost of €400,000, the notary costs would amount to approximately €850.
If a mortgage loan is required, the notary expense will be slightly higher, as two deeds will be needed: one for the mortgage and another for the sale.
Management agency
It is true that the purchase and sale of land can be a long and somewhat complicated process if one is unfamiliar with the laws and the taxes to be paid for the construction of a home and the purchase of the land, bearing in mind that regulations may vary according to the location and conditions of the property.
However, unlike notary fees, management agency (gestoría) expenses are optional, as we hire them to handle tax and deed procedures, although we could carry them out ourselves with time, patience, and knowledge. Their approximate value is around €300, regardless of the price of the land, so it is a matter of evaluating the figures and seeing which option is most beneficial.
2 Construction of the home
The taxes to be paid for the construction of a home are all applied to the PEC (Presupuesto de Ejecución de la Construcción), the Construction Execution Budget, which is determined by the price per m² of our future home.
At Slow Studio, we have cost benchmarks for finished work as a passive house with nearly zero energy consumption per m², upon which certain items are prioritized over others according to the needs of each client.
To the base cost of €1,200/m²—which is what an average builder quotes today—one must add the cost of foundations, which depends on the type of terrain and usually ranges between €200-300/m². Thus, in practice, we calculate the actual built m² at between €1,400 and €1,500, depending on the complexity of the terrain (slope and subsoil resistance).
Taxes
VAT Tax
To the base cost of construction, we must add 10% VAT (Value Added Tax). This is adjusted to 10% because it falls under the reduced VAT for residential use, which applies to buildings or parts thereof suitable for use as homes, including garage spaces (up to a maximum of two units) and annexes located within them that are transferred together.
ICIO Tax
Another tax to be paid for the construction of a home is the ICIO tax, which is the Tax on Construction, Installations, and Works. This is a state tax collected at the municipal level; therefore, it is the City Council that decides whether to charge it, which is generally the case.
This means that the price can vary according to each City Council, so we must inform ourselves in advance, knowing that there are limits set by law, which dictate that the tax cannot exceed 4% of the PEM (Presupuesto de Ejecución Material), the material execution budget.
The PEM differs from the PEC as it represents approximately 65% of the latter, since it only accounts for the cost of materials and the labor necessary for the execution of the work—it does not include general expenses or the industrial and economic profit obtained from the work, which is included in the PEC.
Furthermore, state law specifies a series of bonuses depending on the nature of the property to be built, which may exempt payment: 95% in the case of works declared of special interest, and 50% for construction in Ceuta and Melilla or for projects responding to a development plan, such as official protection housing.
A specific example of how this works is the case of Barcelona, where these bonuses are further detailed, distinguishing in the case of employment promotion whether the development is carried out by a public, non-profit, or private entity—evidently benefiting the first two. It also adds concepts for adaptation for users with disabilities and even sustainability.
The Barcelona City Council rewards future constructions that incorporate systems for the thermal or electrical utilization of solar energy with a 95% bonus, provided these are not mandatory by legal prescription. The application of this bonus is conditional on the heat production installations including approved collectors.
The price in Barcelona specifically reaches 3.35% of the PEM with an additional fee of €51; therefore, for a work costing €6,000, €2,061 in tax must be paid.
Licenses
Building permit
The so-called building permit, urban planning license, or construction permit is a permit required by the local administration to carry out any type of construction. A distinction is made between Major and Minor building permits; in the case of constructing a property, it will always be a Major permit. This also implies that its price depends again on each City Council and is around 4-5% of the PEM.
First occupancy license
Once the Building Permit is obtained, urban planning legislation establishes control over it with the so-called first occupancy license. This is carried out once the work is finished and the final work certificate is delivered, at which point municipal technicians verify that the executed work conforms to the project for which the first license was granted. Without this license, utility companies are prohibited from supplying services.
The price is approximately 0.05% of the PEM. Specifically, in the case of Barcelona, the fees are as follows: for a certificate for a new home, you must pay €42.60; for 2 to 5 homes, €26.25 more for each home; and €19.65 thereafter for each additional home.
Visa
We are going to talk about the visa (visado) even though it is not classified as a tax to be paid for the construction of a home, as it is not a percentage of the total, but simply an added cost to the construction. The visa is the verification by the Professional Association of the identity and personal qualification of the project author, as well as the correctness of the documentation for this work. We will need it to apply for the building permit detailed above.
The price, therefore, differs according to the community in which we are located and depends on a series of coefficients that increase based on the square meters of the future property. For a house of about 120 m², the review price would be about €120 + €73.20 for the in-person processing fee (€27.45 for the online process).
Insurance
In the same way as the visa, insurance is not a tax to be paid for the construction of a home, but we have considered it relevant to detail it due to the general lack of knowledge about it. Similar to a car, every new home is required to have insurance called decennial insurance. It is designed to cover any defects originating in or affecting the structural elements, which directly compromise the mechanical resistance and stability of the building, for the first 10 years.
The price of the insurance depends on the competitiveness of each company, as well as its nature, the surface area available, the price, etc.
An approximate figure could be €2,400 for insurance on a €250,000 home, representing 1% of the PEM in this case.
End-of-work procedures
New construction deed AJD
The new construction deed is subject to a tax on so-called Documented Legal Acts (AJD), which amounts to 1.5% of the PEM cost, although some autonomous regions have set different rates.
This is a tax that comprises the sum of notary, commercial, and administrative documents, each constituting approximately 0.5% of the PEM.
The price may involve a fixed fee per sheet as well as a flexible fee per page, and it charges for the issuance of documents, which must be drawn up on stamped paper—that is, paper containing a stamp tax, similar to the stamped letters we are all familiar with.
Registration in the Property Registry
The public Property Registry is responsible for recording all legal processes involving a property. It registers changes in ownership, and being registered, although not mandatory, provides protection to the owner and is an indispensable requirement when applying for a mortgage loan. Registration expenses depend on the value of the property, with a cost ranging from €600 to €1,000.
Management agency
As in the previous step of purchasing the land, all necessary procedures can be carried out by a management agency for convenience and time-saving. These prices are subject to the free market and are not related to the value of the home being built. They usually range between €250 and €500 and, generally, payment to the agency is made in advance since, during the process, various fees and taxes must be paid.
Registering utility companies
Registering with a utility company means paying the fee—not a tax—to initiate the connection and supply service to the new property, whether for electricity lines, water (and gas, if applicable), as well as the connection to the municipal sanitation system.
For example, in the municipality of Barcelona, the price for contracting water depends on two factors: the contracted power and how long the supply has been disconnected, if it was ever registered. We must pay for the rights of extension, access, and connection, which can vary from €150 to €400. Additionally, when registering the water supply in Barcelona, the price ranges between €50 and €150.
In any case, the utility registration fees are paid through the first bill that arrives at the home, which the supplier will transfer to the corresponding distributor.
Gas, if we need to contract it, will depend on the annual consumption made or to be made when paying the connection fee, which can vary from €120 to €500. Furthermore, a registration fee must be paid, which will depend on the tariff and the autonomous community where the home is located—in the case of Catalonia, about €70-120.
In any case, all these costs are interrelated, as we will not be able to access the registration of various supplies if we are not in the property registry. However, telecommunications are exempt from this rule.
3 Projects and professional management
What can it include?
Finally, we must bear in mind that the construction of a home requires the drafting of an architectural project that includes several associated technicians such as the geologist, the technical architect, or the surveyor.
Each of these projects is considered a professional service subject to 21% VAT.
Let’s look in detail at the list of projects to be drafted for the construction of a home today:
– Architectural project and site management
– Energy certification
– Technical architect
– Geotechnical study
– Topographic study
VAT Tax
The only tax to be paid for the construction of a home that applies to all costs in the project and professional management section is the Value Added Tax described previously. In this case, the General VAT of 21% applies, as all projects are professional services.
If you would like more information about the construction costs of a passive house, the taxes to be paid for the construction of a home, or if you would like to receive an example of total costs according to the square meters you need to build, you can contact us and we will help resolve your doubts.