Essential guide to buying property in Ibiza: costs, process, and tips

After living in Switzerland and Germany for most of my life, I got used to functioning administration offices, precise regulations, and trains running on time (although, for anyone who spent time in West Germany, it’s not always true). Transitioning to Spain, especially in the real estate world, felt like a big change. Ibiza is an island with a unique allure – rich in history, stunning architecture, and vibrant culture. But, like any valuable asset, owning property here comes with challenges, especially with evolving regulations and tax implications. We frequently get questions from our clients, particularly first-time buyers in Spain. It’s time to lay it all out and explain the basics so you can make an informed decision. With over 12 years of local expertise, our team is here to navigate these complexities and guide you to your dream home in Ibiza, ensuring a rewarding investment.

Buying a Second-Hand Property

Ibiza is renowned for its historical properties, rich in heritage and character, including traditional fincas that embody the island's true spirit. Over the past decades, many properties have undergone renovations, often without proper licensing. It’s crucial to conduct thorough due diligence with a lawyer to ensure no critical issues exist and address any infractions to prevent them from transferring during the purchase. For renovation projects, the land category and the property's original build year can impact your plans. Additionally, the taxes applied at purchase will differ based on the property's specifics, as we will see below. Finally, one of the main advantage of buying a second-hand property is that they might already have valid a touristic license, offering more opportunities for maximising your rental yield.

Buying a New Property

Opting for a new property in Ibiza presents several advantages. Off-plan properties often offer an easier process and greater flexibility to customize the final product, along with more attractive payment plans to secure the property sooner. These properties are generally more energy-efficient and sustainable. Advanced projects, though less flexible, provide a clearer sense of the move-in date and still allow for some customization of final touches. It’s essential to know the contractor and carefully review the contract with a lawyer to understand what is guaranteed. Remember, construction on the island can be challenging, often resulting in delays, which should be considered when securing your mortgage with your bank.

Buying a Plot

Ibiza has very few plots left, as more and more areas are getting classified as protected to preserve the island's beauty. Choosing the right plot depends on your preferences and the intended use of the property. Understanding the regulations and potential of each plot type is crucial for making an informed decision.

Ibiza offers various types of plots, each with unique characteristics. The main categories include:

• Rustic Land: Highly sought after but requires more patience for obtaining building permits.
• Urban Land: A more straightforward process, typically smaller, suitable for various budgets, and closer to the island's main areas.

Touristic License

Ibiza is a prime destination for holiday rentals, offering excellent returns on investment. To legally promote and rent a property for short-term rentals (less than a month), you need a valid touristic license. For longer rentals, no touristic license is needed. The newer ETV365 license must be renewed every five years, adding an extra cost, while older licenses do not need renewal. The rental season generally runs from mid-May until late September, with a good year yielding 10 to 12 rented weeks. If you rent your property through an agency, commission fees vary between 10% and 20%, depending on the services required. As of July 2024, it's currently not possible to get a touristic licence granted, but the market and regulations are evolving fast.

Purchase Costs

Buying a property in Ibiza is associated with various costs. It's important to let your broker know if the property budget you discussed includes these costs or not. Let’s break down the costs and taxes so that you can avoid any surprises when looking for a property:

Property Transfer Tax for Second-Hand Properties

The Transfer Tax, or ITP, only applies to existing properties. It is what we call an accumulative tax, so the first €400,000 is charged at 8%, adjusting at each point until reaching 11% from €1,000,000 and above.

• Transfer Tax (ITP):
  • Up to €400,000: 8%
  • €400,000 to €599,999: 9%
  • €600,000 to €999,999: 10%
  • €1,000,000 and above: 11%

Value Added Tax (IVA)

The VAT, or IVA in Spain, applies to first occupancy (brand new built), on-going project, or land. When an IVA is applied, an additional Stamp Duty (AJD) is to be paid when registering the property under your name.

• Residential properties: 10% of the sale price
• Land or commercial properties: 21%
• Stamp Duty to be added (AJD): 1.5% when IVA is due

Other Costs

• Lawyer’s Fee: 1% to 1.5%
• Notary and Registration Fee: Around 1%

Calculation Examples

Let's break down two examples to give you a better idea of the purchasing costs for different budgets on the island:

New Property Purchase of €5M

In this case, the costs amount to 13.5% of the value of the property, for a final purchase cost of 5.675 million euros.

Second-Hand Property Purchase at €8M

In this case, the costs amount to 12.75% of the value of the property, for a final purchase cost of 9.02 million euros.

It's important to understand the different cost breakdown and communicate to your broker if your budget includes those costs or not when starting your search process.

Note: These numbers are estimates and for informative purposes only. Actual costs may vary.

Annual Taxes

Once you own property in Spain, you will be subject to annual taxes which will be determined based on the property value and assets you owned on the 31st of December.

IBI Property Tax

All property owners, whether resident or non-resident, are subject to the IBI tax. This tax is based on the cadastral value, which is the assessed value determined by the town hall and is often significantly lower than the market value (often up to 50% below the market price). The IBI tax rate ranges from 0.3% to 1.1% of the cadastral value, depending on the property's location (rural or urban) and the specific municipality. The rate is decided by each municipalities and is the same for all properties.

IRNR/IRPF Income Tax for Non-Residents

IRNR (Impuesto sobre la Renta de No Residentes)

This tax applies to non-resident property owners in Spain. If the property is not rented, a deemed rental income is assumed at 1.1% of the cadastral value, taxed at 19% for EU residents and 24% for non-EU residents. If the property is rented out, actual rental income is taxed at the same rates.

IRPF (Impuesto sobre la Renta de las Personas Físicas)

This is the income tax for residents in Spain. For property owners, it applies to the net rental income after deducting expenses, taxed progressively from 19% to 47%.

Wealth Tax

Wealth tax applies to all property owners, with a tax-free allowance of €3,000,000 as of January 2024 (this is an important change as the previous threshold was 700'000 EUR). Beyond this threshold, the tax rate ranges from 0.2% to 3.5%, based on the net value of the property after mortgage deductions.

Note: These tax details are for informational purposes only and may vary based on current regulations. We strongly advise you to consult a tax advisor for more details.

Usual Purchase Process

When buying a property in Ibiza, understanding the typical purchase process is crucial. This process involves several steps to ensure a smooth and legally sound transaction. Below, we outline the key stages, from property selection to final registration, to help you navigate your property purchase with confidence.

1. Property Selection and Reservation:
   • It's sometimes possible to negotiate a reservation fee to secure the property early on, typically included in the overall purchase price.
2. Due Diligence:
   • Your legal representative will verify the property's legal status, ensuring there are no outstanding debts or legal encumbrances. Having an architect during this process adds security and can help avoid surprises.
3. Private Contract (Contrato de Arras):
   • A contract outlining the sale's terms is signed, accompanied by a deposit payment (usually 10% of the purchase price). After paying the deposit, the seller is legally bound to sell the property to you. If the seller fails to do so, they must return double the deposit amount (20% of the total price). Conversely, if you decide not to proceed, you will forfeit the 10% deposit.
4. Finalization:
   • The remaining balance is settled, and the title deed is signed before a notary, officially transferring ownership to you.
5. Registration:
   • Register the property in your name in the public registry to finalize the purchase process.

Conclusion

Hopefully, you now better understand the implications of buying a property in Ibiza. It's crucial to budget all these costs into your project. For first-time buyers in Spain, we highly recommend getting help from a financial expert. Experienced buyers will also benefit from this, as several strategies can be applied to reduce those costs.

Buying a property in Ibiza is a nuanced and rewarding journey. With its rich history, and unique regulations, having expert guidance is essential. While it may seem daunting, we are here to accompany you every step of the way. Our team is dedicated to making your property purchase as smooth and enjoyable as possible. We will also put our personal network at your disposal, ensuring that you have all the support you need. Let us help you find your dream home in Ibiza.