Investing in the property sector can be both lucrative and challenging. For smart investors, understanding how the assignment contract works can make a big difference, especially when it comes to saving money and maximising profits.
In this article we'll explain the assignment of contractual position in property sales (CPCV), a strategy that can help you save on property taxes.
What is a Promissory Contract of Purchase and Sale (CPCV)?
A Promissory Contract of Purchase and Sale (CPCV) is a contract in which a seller (promissory-seller) agrees to sell a property to a buyer (promissory-buyer), and the buyer agrees to buy it at a later date.
Sometimes, the original buyer transfers their position to someone else, who becomes the new buyer. This is called a transfer of contractual position and can have major tax benefits.
Why give up your contractual position?
Assigning your CPCV position can give investors a lot of flexibility. Whether you want to make a profit before the final purchase or save on property taxes, understanding how to do this can be very rewarding.
The amount of money you can save depends on how the original contract is worded, so it's important to plan carefully.
Two ways of assigning positions
The allocation of a position in a CPCV depends on whether the seller's authorisation is included in the contract from the start or is given later. Here's how each situation affects your investment:
1 - CPCV with a free transfer clause
If the CPCV has a free transfer of contractual position clause, the original buyer can easily transfer his position to someone else. However, they must pay IMT (Municipal Property Transfer Tax) on the deposit.
For example:
Buyer A signs a CPCV to buy a property worth €200,000 from seller B, with a down payment of €20,000.
If the IMT rate for the whole property is 6.5%, buyer A pays IMT on the deposit: 6.5% of 20,000€, i.e. 1,300€.
When buyer A completes the total purchase, they can deduct the initial IMT paid from the final amount of IMT due. This can lead to significant tax savings in the long term.
2 - Transfer of position without free transfer clause
If the original CPCV does not have a free transfer clause, no IMT is payable when the CPCV is signed. Instead, IMT will be due when the final purchase of the property is completed.
Using the same example:
Buyer A signs a CPCV without paying IMT at first.
Buyer A later sells his position to Buyer C for €30,000 (down payment plus an additional profit of €10,000).
Buyer C then completes the purchase from seller B for €200,000.
In this case, buyer A has to pay IMT on the total value of the property (€200,000) within 30 days of the final transaction. This means €13,000 in IMT costs.
Not having a free transfer of position clause can lead to paying €11,700 more in IMT compared to the first scenario.
Considerations on capital gains
In addition to IMT, the transfer of a contractual position can also result in capital gains tax. Capital gains are calculated in a similar way to the sale of a property. However, typical deductible expenses, such as estate agents' fees, registration costs and taxes from the original purchase, cannot be deducted when transferring a position.
How to make assignments work for you
Knowing how to strategically allocate your position in a CPCV can make a big difference to the financial results of your investment. Whether it's reducing taxes or making a profit through allocation, smart investors can take advantage of this contractual flexibility.
Key findings for investors
- Tax savings: Choosing a CPCV with a free assignment clause can help you save a lot on taxes.
- Capital gains: Always consider the potential capital gains tax when you sell a contract, as it can affect your overall profit.
- Get expert help: Real estate transactions can be complicated, especially when you're trying to save on taxes. Working with experienced professionals can help you structure contracts in the best way to achieve your financial goals.
Why choose Invest351 for your property investments?
At Invest351, we specialise in real estate investments with a complete approach that includes structuring contracts to obtain the best returns.
Our team is here to help investors understand the property market - whether it's through the use of assignment, reducing tax payments, or finding the best investment opportunities.
Contact us to explore your options and find out how a strategic approach can help you save money and increase your income.
