Cesar Answers: Rent or Sale

Client question:

My husband and I are retired and live in California. I am Spanish and my husband is from the United States. We are seriously thinking about moving to Spain. Our dilemma is what to do with our home here in California. We do not want to sell it because if, in the future, we want or need to return to this area it would be impossible to buy something again because of how expensive the property is in this area.

If we leave the house to our children so that they could live in it and help pay the mortgage (which is not much) would we have to pay taxes in Spain on “the rent” they paid? The amount would be minimal and about 1/3 of what a rent costs, that is to say that there would be no profit.

Cesar answers:

Personally, I think that somebody moving to Spain long term is better served if they sell their primary residence before they move or ia year, they are still NOT a tax resident of Spain for the following reasons:

They will owe no tax to Spain since they are not tax residents yet.
$500,000 of the gain would be tax exempt, if married and $250,000 if single.

However, in the case of this couple, they CAN retain the property as a rental.

Giving a discount to their children may seem like a good idea but I would recommend against doing this. By giving a discount, this would NOT be a rental property and could be considered by the IRS and California a primary residence. They would both disallow rental expenses, and California would claim that the owners are still California tax residents and tax them even if they spend their whole time in Spain.

I would recommend that they charge their children fair rental value, and if they want, they can give their children cash as a gift. If the gift to each child from each parent is less than $19,000 in 2025, they do not have to file a gift tax return.

I must give a warning: after 3 years of renting the property, they would no longer qualify for the 250/500K gain exemption from the IRS. And if by the time of the sale, they are tax resident of Spain, the gain on the sale will be taxed in Spain.

If they never sell the house and they leave it to their children, they would never pay tax on the gain in the US. Their children would get a stepped-up basis, meaning their tax cost would be the value on the date of death, which is a good thing. But since they are now residents of Spain, they may be subject to Spanish inheritance tax.

This is why I think that, all things considered, the simplest thing to do is to sell it before the move, but tax should not be the thing that rules our lives. And everybody is different, we have different priorities, time horizons, etc. For a free consultation write Admin@USTaxesSpain.com