The way the Spanish tax system treats rental income is reasonably logical but there are some peculiarities that need to be understood.
Firstly, treatment depends on where the owner is tax resident:
- If resident in Spain or another EU/EEA country, tax is payable on rent receivable after deductible expenses.
- If resident in a non EU/EEA country, tax is payable on gross income with no deductions for any expenses being allowable. This is grossly unfair and at some point in the future the courts will probably rule that this treatment is unconstitutional.
The rest of this article is focused on individuals who are tax resident in Spain or elsewhere in the EU/EEA.
Deductible expenses are defined simply in the law (literal translation) as “All those that are necessary for obtaining income”. The law goes on to give specific examples of deductible expenses:
- Interest on loans taken out to finance acquisition, improvements and maintenance of the property.
- Maintenance, repairs and renewals. Expansion or improvements of the property are not deductible.
- Non-state taxes and surcharges related to the property, excluding any fines. This category covers costs like IBI and basura charges.
- Personal services supplied, e.g. administration or management charges, community fees, security, porters.
- Legal costs related to rental contracts and defending property rights.
- Insurance policy premiums.
- Utility costs.
- Unpaid rents. Note that rental income is the amount of rent receivable (not received), according to the contract. Unpaid rents are not considered deductible until six months have passed from the first debt collection action or if the tenant is legally insolvent.
- Depreciation of the property at 3% of the higher of the cost of buildings or the catastral value of the buildings. The cost of buildings is frequently not known as the purchase deed does not usually separate the two. In this case the buildings proportion is taken from the catastral value and failing this (e.g. non Spanish property) the tax office will accept that buidings represent a reasonable proportion, perhaps 2/3rds of total cost.
Costs listed under 1. and 2. above may not exceed total rental income. Any excess not deducted may be deducted in the following four years. Consequently, it is possible to generate a loss for renting a property and, for residents of Spain only, such a loss is available for set off against other income.
All deductible costs must be justified with suitable documentary evidence.
Some advisers and tax officials, regard the above list as a definitive and exclusive list of deductible costs. This is not true. The definition in the law allows any properly documented and necessary costs, not just those listed. The problem lies in proving costs to be necessary.
At the present time the tax office interprets the deduction rules as only allowing the deduction of annual costs according to the number of days a property is actually rented during the year. In other words, most costs are not deductible for the empty periods. This treatment applies to all listed costs except those mentioned in 2. 5. and 8., which are deductible regardless of the number of days of rental.
Unoccupied periods are subject to a deemed rental income assessment. This is the same treatment that applies to the ownership of all second homes, wherever located. Assessable income is between 1,1% and 2% of the valor catastral, with the lower rate applying when the valor catastral has been revised in the last 10 years. In the case of unoccupied rental properties, the deemed rental income assessment is restricted to the number of unoccupied days in the year.
Example of partial year rental:
Property was let January to October and then for December. Rent was 1.000 euros per month and deductible property costs, IBI, Basura and community fees, were 3.000 euros and depreciation was 4.000 euros. The valor catastral of the property was 200.000 euros and
- Total rental income was 11.000 euros
- Deductible costs are 2.750 euros (11/12 of 3.000)
- Deductible depreciation 3.667 euros (11/12 of 4.000)
- Net taxable rental income 4.583 euros
- Deemed rental income for unoccupied month 183 euros (200.000 x 1,1% x 1/12)
For Spanish tax residents only, net rental income from residential lettings is subject to a general 60% deduction. This very attractive regime is conditional on being able to prove that the property is rented as the home of the tenant. Problems will occur in the case that:
- The contract states that the property is not being used as the home of the tenant. Lawyers often recommend such terminology in order to reduce tenant occupancy rights.
- The tenant is not fully identified in the contract using the Spanish DNI/NIE, passport number or similar. Identifying tenants in this manner is not normal in some countries but is essential to claim the 60% deduction.
Taking the above example, net taxable rental income is subject to a 60% reduction from 4.583 euros to 1.833 euros.