I have a rented property, how is it taxed on my income tax?

The real estate sector has historically been, and continues to be, a fundamental pillar of the Spanish economy. For some time now, due to the tourist rental boom and the exodus of workers from small provinces to large capitals, the rental market has been booming in Spain for some years, especially in large capitals and coastal areas, with many people acquiring properties to rent them out.

What types of rentals are there?

Firstly, it is important to distinguish the intended use of the property and whether the owner of the property of the property is a natural person or is it a company.

We understand the following as possible destinations for the properties:

  1. Rent for primary residence
  2. Renting for use other than as a primary residence (seasonal renting)
  3. Rental for tourist use.
  4. Rental of a building for use as premises

In legal terms, the leasing of urban properties is regulated by Law 29/1994, of 24 November, on Urban Leases (hereinafter, LAU). While Title II regulates leases for the habitual residence, Title III regulates leases for use other than housing.

It is considered renting for use other than as a dwellinga tenancy in respect of a building whose primary purpose is other than to meet the tenant's permanent need for a dwelling.

And, when there is a temporary transfer of use of the entirety of a furnished and equipped dwelling in conditions of immediate use, marketed or promoted in tourist offer channels and carried out with a lucrative purpose, it shall be considered as a tourist rentalwhich will be subject to a specific regime, derived from its sectoral tourism regulations, as established in art. 5 e) of the LAU.

How is the rental of a property taxed in my personal income tax return?

In general terms, any property rental must take into account its VAT treatment and how the income generated is taxed for personal income tax or corporate income tax purposes, depending on whether the property is owned by an individual or a company.

If the lessor of the property is a natural person resident for tax purposes in SpainIn principle, the rent is subject to personal income tax, and in principle, as a return on real estate capital (ROCE). However, if certain requirements are met, such rent can be taxed as income from economic activity (RAE).

Although both incomes go to the general tax base and therefore the same tax scale applies, this difference is not trivial and may have important consequences for the employer's future business reorganisation.

Consideration of renting as an economic activity

Only if the lease is made as economic activity, the income obtained is considered to be income from economic activity.

Article 27 of the Personal Income Tax Law defines income from economic activity as:

"Full income from economic activities shall be considered to be that which, deriving from personal work and capital together, or from only one of these factors, involves the taxpayer's own management of means of production and human resources or one of both, for the purpose of intervening in the production or distribution of goods or services".

However, in order for property rental to be considered an economic activity, article 27.2 of Law 35/2006, of 28 November, on Personal Income Tax, requires that the activity must be carried out in the course of the activity, at least one person employed on a full-time contract of employmentThe Commission shall be responsible for the performance of this management.

The requirement to have a person employed is intended to establish minimum requirements so that the activity of renting out real estate can be understood as a business activity, with a minimum infrastructure of an organisation of business resources.

But if the rental of the dwelling is for tourist use and this is not limited to the mere making available of part of the real estate for periods of time, but is complemented by the provision of services specific to the hotel industry such as restaurant, cleaning, laundry and other similar services, the income derived therefrom shall be treated as income from economic activities. (Consultation V1651-18, of 12 June) On the other hand, the Directorate General for Taxation has indicated in various consultations (V0953-17, among others) that eThe person employed may be a family member of the owner of the property, the essential requirement being that it must be a full-time employment contract in accordance with labour legislation, regardless of the Social Security contribution regime [1].

2. Difference between the rental of real estate when taxed as real estate capital (RCI) or as an economic activity (RAE).

There are several substantial differences between one type of performance and another:

a) Deductible expenses

For the determination of the return on real estate capital, a the rental income earned, a number of taxed expenses can be deducted and always taking as a limit the amount of the total income.

Among others, it is possible to deduct repair and maintenance expenses, amounts paid for personal services of third parties related to the property (porter, security, etc.), interest paid for the financing of the property or non-state taxes paid, such as IBI or rubbish tax. Likewise, yields can be reduced by the amounts of doubtful rent.

On the other handThe determination of the economic activity income is calculated in accordance with the corporate income tax rules.which is based on the accounting result for the year. This means that in order to calculate this income, the taxpayer must subtract from his income all expenses incurred and correlated to the generation of those revenuesThere is no specific list delimiting which expenses are deductible, leaving the option to deduct any expense, provided that the taxpayer can prove the correlation between the generation of the rental income and the deductible expense.

In addition, and in the case of applying the simplified direct estimation method of the SAR, it is possible to apply the generic reduction of 5% as provisions and expenses that are difficult to justify2,000, always respecting the maximum limit of 2,000 euros.

b) Depreciation costs

With regard to the depreciation of the real estate, whereas when determining the income from real estate capital, can be deducted as depreciation on 3% of the acquisition value of the building (or of the cadastral value of the same if it is higher), in case of income from economic activities the tables approved by the Corporate Income Tax Act must be used, allowing a deduction of 2% of construction acquisition value at most per year (or amortisation over a maximum period of 100 years).

However, if we are dealing with a RAE under the simplified assessment regime [2], specific tables are applied that allow this percentage to be increased to 3% (maximum depreciation period of 68 years), so that it would be equal to the RCI for practical purposes.

(c) Income imputation

When the property intended for rent is unoccupied during a certain period in the year, if this is taxed as income from real estate, the taxpayer must determine the income imputation amount [3] proportional and include it in their tax base.

This obligation, much criticised by the tourist rental sector, has recently been ratified by the Supreme Court in its ruling of 25 February 2021, in which it concluded that landlords must charge income to their personal income tax while the properties are empty and, furthermore, cannot deduct any expenses while this situation lasts.

On the other hand, when the rental of immovable property is considered to be assigned to a economic activity, there is no obligation to impute income during the days of the calendar year in which it has not been rented.

d) Reduction of a fixed amount on net income or for starting a business activity

These reductions, regulated in Article 32 of the Personal Income Tax Law, are reductions specific to the determination of income from economic activityand would therefore result in application only in the event that the rental of immovable property is so defined.

e) Reduction of 60% in the case of use as main residence

Finally, it is important to remember that in the case of property leases for housing, provided that they are taxed as income from real estate capital, the personal income tax regulations regulate a reduction of 60% of positive net income.

This reduction has been the subject of controversy when it was a company is the lessee of the property to be used as housing for their employees. In such cases, the Directorate General for Taxation will had been denying that the abovementioned reduction could be applied on the grounds that in that case could not be credited that the purpose of the rent was to tenant's own permanent dwelling.

However, the Central Economic-Administrative Tribunal finally ruled on this issue in its resolution of 8 September 2016, concluding that it was appropriate to apply the reduction of 60% stated, "where the lessee is a legal person, it is established that the property is intended for the residence of certain natural persons", and this"can be perfectly evidenced by the facts and terms of the lease".

Therefore, in order to be able to apply the abovementioned 60% reduction, if the tenant is a legal entity, the rental contract signed with the landlord must state that that the exclusive use of the property is that of the habitual residence of a specific natural personIt would therefore be advisable to include in the contract the full identification of the employee who will be using the dwelling as his or her habitual residence.

(f) Transfer of immovable property

Finally, it is important to take into account, when a transfer of the rented property takes place, whether or not the property was used for an economic rental activity.

In the event that if it is not engaged in any economic activity, the reduction or abatement coefficients could be applied. of the 9th Additional Provision of the Personal Income Tax Law, which could not be applied if the property transferred was used for the economic activity of renting out real estate.

3. The importance of taxation of real estate as RCI or as RAE

When we talk about the taxation of property rental as income from real estate capital or as income from economic activities, we overlook an issue that is not trivial, especially for those taxpayers who own several properties: treating it in one way or the other may have important consequences for other taxes.

To the extent that the property is used for the economic activity of renting, all regulations relating to the conduct of an economic activity, operation of a company or private business would apply to it.. This means, among other things, that:

  • The properties may be exempt from property tax.provided that (i) they are necessary for the development of the business activity and (ii) it is carried out habitually, personally and directly by the taxpayer and constitutes his main source of income, in accordance with Article 4.8.1 of the Wealth Tax Law.

  • In the same way, the transfer of the real estate by gift or inheritance could benefit from family business reductions of Article 20 of the Inheritance and Gift Tax Act.

  • And, the donation in favour of descendants of these properties could be exempt from personal income tax if it meets the requirements of Article 33.3.c) of the Personal Income Tax Act.

It should not be forgotten that, even if in the lucrative transmission intervivos of a real estate property in favour of the children may be eligible for a 99% gift tax rebate, the donor often faces a significant personal income tax burdenThis exemption is therefore relevant for the difference between the value of the property when it was acquired and its value at the time of donation.

  • Nor should we forget that in the event that the taxpayer would like to to transfer these properties to a company in order to continue to operate them through that companyIn so far as they are regarded as assets assigned to an economic activity [4], such a contribution is could benefit from the special tax regime of Chapter VII of Title VII of the Corporate Income Tax Act, provided that all the requirements for this are met. In this way, the taxation that would arise in personal income tax on the capital gain that occurs in the individual when transferring the real estate to his or her company would be avoided.

Non-Resident Income Tax (IRNR) taxation

But, if the the owner of the property is a non-resident for tax purposes in Spain, in that case, the property rental would be taxed at the rate of Non-resident income taxregulated by Royal Legislative Decree 5/2004 of 5 March 2004.

In this case, when determining the net rental income for non-residents, it should be noted that while for non-residents, the net rental income for non-residents is citizens of the European Union, Iceland and NorwaySpanish law allows the deduction of the same type of expenses that are allowed for a Spanish tax resident in the Personal Income Tax Law, provided that it is proven that they are directly related to the income obtained in Spain, and it applies a 19% tax rate; for the non-EU residentsUnder the IRNR regulations, tax is payable on the full income obtained, without deducting any expenses and applying a rate of 24%.

And, it should not be forgotten that it will also be necessary to pay tax for the imputation of rent corresponding to the days on which the property has not been rented during the calendar year and has remained at the disposal of its owners.

In summary, it is extremely important not to lose sight of this differentiation between the different types of income under which the rental of real estate can be taxed for personal income tax purposes (income from real estate capital or income from economic activity) and the different types of income (income from real estate capital or income from economic activity). to carry out proper tax and estate planning of each taxpayer's assets in order to minimise the tax burden within the legal channels established for this purpose.


Notes and clarifications:

[1] In order to be considered an employment contract, the family member must be covered by the General Social Security Scheme (RGSS). To do so, the family member must perform work that can be proven to be an employee (i.e. the family member must be considered an employee of the employer) and without there being (economic) cohabitation between the owner of the economic activity, as the employer, and the family member, as the worker.

[2] Simplified direct assessment may be applied if (i) the net turnover of the previous year does not exceed 600,000 euros, (ii) the taxpayer does not apply the ordinary regime in any other activity and (iii) his activities are not subject to the objective assessment regime (modules).

[3] The rent imputation is determined as 2% of the cadastral value of the property or 1.1% for those properties whose cadastral value has been revised.

[4] The assignment of assets by the taxpayer does not constitute an alteration of assets, provided that the assets or rights continue to form part of his assets, and therefore, there will be no capital gain or loss for personal income tax purposes. Furthermore, it is understood that there has not been a transfer of assets to the taxpayer's assets, provided that the assets or rights continue to form part of the taxpayer's assets. if the assets are disposed of within three years of the transfer of ownership.

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September 7, 2023