Not sure if this is the right place to post this but I have a question about the Real Estate practice of paying black money or a portion of the price in cash and underdeclaring the value for tax purposes... I am a little uncomfortbale doing this and would rather just pay the taxes on the full value.. am I being overly cautious, is "everbody really doing it" or am I right to want to avoid it? I have read that the government is cracking down on this as well. I have a seller who is threatening to back out of a contract unless I agree to it and I dont want to lose this place but I am scared to do it and would rather just pay the tax man!

It is (unfortunately) a very extended practice, however, I think you have the right to make the laws being respected.

This is, in part, a consequence of an unfair tax that makes you pay 7% of the value of the property being transferred. It is an absurd tax in my opinion.

Fernando

The seller has to pay 7% or the buyer?

If nothing is stated in the private contract, it is the seller who has to pay that 7%. But it can be stated in the contract that the seller wants X money for their property and it is the buyer who has to pay for all taxes related to the operation. So, it is the seller unless it is stated otherwise.

The practice is very extended, but you have to take into consideration what the amount of 'dinero negro' are you dealing about. If the cost of the property is, say, 200K euros and the seller wants 180K 'clean' plus 20K 'black', probably the government will never know. The issue is, if you want to get a mortgage on that property, you can only value it on the 180K. However, if the deal is 100K plus 100K, it would be more difficult to hide.

If you feel uncomfortable, do not do it.
I have friends who work as police officers and they faced the same situation two years ago (it took them a couple of months to find a promotor that would sell a sobre plano legally.
It also increases market prices and it is illegal. In the end, you pay more than the taxed value and it also lowers the percentage of mortgage the bank will give you (mortgages are based on tax value, not purchase price).
Having said that, several of my friends have purchased homes and the banks themselves have lowered the purchase price to avoid taxes. One bought at 310k and paid taxes on 260.000. So, if the bank suggests it, ??? what is one to think?
In Madrid, in my experience it's hard to find a piso sold at the taxed value. Banks are tightening up and are more hesitant to give out loans.
About the 7% Fernando was talking about- there are costs involved in buying a property...they can be as high as 12%. Make sure you research...are you going through a Spanish bank? You might want to contact a lawyer if you don't have someone helping you in Madrid.

I do have a lawyer and he basically said that people do it but going over 20% of the purchase price is risky .. actually the bank has NO problem with it and will even give the seller the cash to hand the buyer ... Crazy if you ask me... I would rather not jeopardize anything to save a few $$ .. the seller I udnerstand has to pay 35% capital gains so has a lot more to lose than I do .. but I will have to do the same when I sell and if the value is understated I will get stuck paying inflated gains on unrealastic profit.

what percentage are they asking over the written price? If it's over 20%, I think your lawyer has a valid point. What percentage is it over the taxation? It would kill me to buy something in that fashion, especially knowing they can't make a deal without something shady taking place. It would make me questions whether or not the person I'm dealing with has told the truth about the property. I'm sorry you're put in this position; there is nothing more frustrating than finding the perfect house and have the people jerk you around (I just went through false promises and wasted about 6 months of my time and effort). From the day I decided to move on and find another flat, I was in a new apartment in 2 months.

The taxes involves in a Real Estate operation are three:
- impuesto sobre transmisiones patrimoniales y actos jurídicos documentados:it is the 7% mentioned before (actually, I am not sure if it is 6% or 7%, because I know it has changed in the last decade, but I don't remember which way it changed). It has to be payed by the seller unless otherwise stated in the contract. The administration who claims this tax is the Autonomous Community.
- impuesto sobre el incremento de valor de los terrenos de naturaleza urbana ('plusvalia'): claimed by the Municipality where the property is. It is not based on the purchase amount, but on a fiscal value of the property called 'valor catastral'. It has to be payed by the seller unless otherwise stated, and it is usually a small amount comparatively.
- impuesto sobre la renta (personal income tax): this has to be payed always by the seller and it is a tax on the profit they got by selling the property (Sale price - Buy price updated by certain percentage depending on the years passed = Profit). The rate of this tax depends on the personal circumstances of the seller, and this is the 35% you mention. It can be as low as 0% if the seller reinvests their gains in a new property to live in as a permanent residence. This tax is payed to the central government and the automous community, in the same yearly declaration where you put your salary, your bank interests, etc.

it is a personal decision of course.
you will have to do it too when you sell or pay higher capital gains;its a cycle.
I have done it and no second thoughts about it.
your call

I am new in the forum, its my first post and I am sorry if my english is not good.

Torrales said:

The tax actually it is 7% and has to be paid by de buyer not the seller (article 8,a RDL 1/93 TRLITPAJD (this is the oficial name of the law, sorry I´m a lawyer) and this article especifically not allow the tax to be paid by the seller: "cualesquiera que sean las estipulaciones establecidas por las partes en contrario".

In the personal income tax (IRPF) if the seller sold his property after one year of buying it, the tax rate it is a fixed 15%, otherwise less than a year it is as Torrales said 0% (never unless you sold it for the same price than you bought it)to 45%.