In the Income Tax campaign it is usually the case that taxpayers, when they have to declare the income for having a rented property, believe that the “bill” with the Tax Agency is going to be sky high. They do not know that a series of expenses can be included, totally deductible, that reduce the net rental income.
Expenses necessary to obtain income
Article 23 of the Income Tax Law (Law 35/2006, of 28th November, on Personal Income Tax) and Article 13 of its Regulations (RD439/2007, of 30th March) establish, at the time of calculating the rental income, that the income obtained can be reduced by the expenses necessary to obtain it:
Interest on the mortgage loan formalized in the acquisition of the dwelling.
- Expenses of repair and housing maintenance, as long as the corresponding invoice is available.
- Tax on real estate and garbage tax.
- Community fees.
- Insurance premiums.
- Doubtful balances, provided that they meet the conditions established by regulations:
- The tenant is in a situation of insolvency.
- When more than six months have elapsed between the time of the first collection action by the landlord and the end of the tax period.
NOTE: If an amount that has been declared as an expense because it is a doubtful balance is subsequently collected, this collection must be declared as income in the year in which the collection occurs.
- Invoices for third party fees such as, for example, those occasioned by the formalization of the lease contract by a law firm, surveillance expenses, porter’s fees, etc.
NOTE: The total amount of the expenses to deduct can never exceed the amount of the income. The excess that may occur will be deductible in the following four fiscal years, without in any of these years, together with the expenses, exceeding the income of that year.
In addition to the deductible expenses mentioned in the previous section, there is another expense that can be included, which is called “amortization”.
- What does amortization consist of? It is the loss of value (effective depreciation) that the real estate suffers over the years.
- How is this expense calculated? Applying 3% on the acquisition value of the property or on the cadastral value, excluding the part that corresponds to the value of the land.
- How do you know which is the value of the land and which is the value of the construction? Prorating the acquisition cost between the cadastral values of the land and the construction of each year. That is to say, if, for example, starting from the cadastral values we see that 70% of this value is the cadastral value of the construction, then the value of the construction will be 70% of the acquisition cost of the house.
When calculating the amortization, it is of interest to amortize on the higher of the two values indicated above: acquisition or cadastral value. If the property is very old it is usual that the cadastral value is higher than the acquisition cost, so it would be interesting to take the first one as the basis.
However, it is important to bear in mind that, if the property is sold in the future, this will affect the acquisition value of the property. In this way, the acquisition value will be reduced in the tax deductible depreciations, which will mean that the capital gain that can be generated by the sale will be greater than if no depreciation had been applied when the property was rented. In the same terms the Directorate General of Taxes responds to the binding consultation V3145-18 at the request of a taxpayer.
Let us take an EXAMPLE:
House acquired in 2001 for 90.000 euros, being the value of the construction 70.000 euros and 20.000 the value of the land. The cadastral value of the construction is 50.000 euros.
Basis construction acquisition value: 70.000 x 3% = 2.100 euros.
Basis of cadastral value: 50.000 x 3% = 1.500 euros.
In the example we are dealing with here, it is interesting to take the acquisition value of the construction as the basis for the calculation, so that 2.100 euros is included as an expense each year. However, when the accumulated depreciation reaches 70.000 euros, it will no longer be possible to deduct more expenses for this concept.
NOTE: In the case that the property has not been rented during the whole year, the expenses will be prorated according to the time that it has been rented. This refers both to (i) deductible expenses and (ii) depreciation.
Reduction for rental of housing:
In addition, to the net income obtained once all deductible expenses and depreciation are taken into account, a reduction of 60% can be applied when the destination of the leased property is for use as a housing.
Continuing with the previous EXAMPLE:
Annual income of 7.200 euros, deductible expenses of 2.000 euros and amortization 2.100 euros for housing rented all year and for its use as housing.
|Income to declare||=||1.240|
As can be seen, once all the deductible expenses are considered, plus the depreciation and the 60% reduction, the amount to declare for rent goes from 7.200 euros to 1.240 euros. The saving in the tax “bill” is considerable.