The deduction for rental housing is a tax benefit that can be applied to the Personal Income Tax (IRPF) in Madrid and throughout Spain. This rental deduction allows tenants to reduce their tax burden by alleviating the costs associated with renting their income. In Madrid, as in other regions of Spain, the rental deduction can mean significant savings for taxpayers who meet the established requirements. But it all depends on the rental price, so it is important to consult a property manager and tax advisor to fully understand the details.

To begin with, it is crucial to understand the rental types, their different prices, when the well-known reduction applies, and what expenses can be deducted according to their type. Understanding this makes the difference between choosing high rents or lower rents with a rent deduction.

What is income tax (IRPF)?

The personal income tax (IRPF) is a tax that taxes the income obtained in a calendar year by natural persons residing in Spain. This tax is crucial to finance essential public services such as education, health, infrastructure and social programs. The personal income tax reflects the constitutional tax principles and material justice. It is a personal and periodic tax that plays a vital role in supporting public expenses in Spain.

The personal income tax, or personal income tax, is a tax obligation that taxes people’s income during a fiscal year, taking into account their profits and losses.

The Tax Administration annually publishes a table that determines the percentage applicable to the taxable base, that is, the net income after deducting family minimums, contributions to pension plans and other aspects.

Income and rental deduction within personal income tax

The treatment of rent in the Personal Income Tax (IRPF) in Spain varies depending on whether it is rent received (income) or paid (deductions). Here I detail both cases:

Rental income

If you own and rent a property, rental income is considered income from real estate capital and you must include it in your tax return. You must declare all the income received during the year, and may deduct expenses related to the rented property. These expenses may include:

1. Loan interest and other financing expenses: interest and expenses derived from loans used for the acquisition or improvement of the property.
2. Conservation and repair: expenses intended to maintain the normal use of material goods.
3. Taxes and fees: IBI, garbage fees, etc.
4. Insurance: insurance expenses on the property.
5. Services and supplies: water, gas, electricity, etc.
6. Amortization: a percentage of the acquisition cost or the cadastral value of the property.

Additionally, in the case of “rental for primary residence” there is a 60% deduction for rental housing when it is rented for the tenant’s habitual residence. In the case of temporary rental, the deduction is null, but the legal security is greater and the income is higher.

In the case of rental housing, the income obtained is taxed at the marginal rate, which varies according to the economic situation of the taxpayer. To determine the tax rate, it is necessary to know the taxpayer’s income levels.

Example of calculating rental income in habitual residence

Suppose you rent a home and have received 12,000 euros in one year for the rent. The deductible expenses are the following:

Interest on a mortgage loan: 1,500 euros
Conservation and repair costs: 800 euros
IBI: 300 euros
Home insurance: 200 euros
Services and supplies: 500 euros
Amortization: 1,200 euros

The net rental yield would be:
12,000−(1,500+800+300+200+500+1,200)=7,500 euros

Then, you would apply the 60% reduction on that net return:
7,500×0.60=4,500 euros

Therefore, the reduced net income that you must declare would be:
7,500−4,500=3,000 euros

This is the amount that would be included in your personal income tax base as income from real estate capital.

Example of calculating rental income in temporary housing

The difference is that the income is higher, around 20%, in exchange for reducing the deduction, that is.

The net rental yield would be:
(12,000*120%) −(1,500+800+300+200+500+1,200)=9,900 euros

Therefore, the reduced net income that you must declare would be:
9,000 euros

The profitability of rental housing

The profitability of temporary rentals with the rental of a habitual residence can vary considerably depending on various factors, including the location of the property, the demand for temporary rentals, local legislation and associated costs and housing deductions. Below, I present the reasons why we opt for temporary rental and give up our habitual residence.

Advantages

1. Higher income: Medium and Short-term rentals, especially tourist rentals, tend to generate higher income per night compared to long-term rentals.
2. Flexibility: You can adjust prices depending on the season, increasing them during periods of high demand (holidays, local events).
3. Variable occupancy: You can use the property for personal use when it is not rented.
4. Deduction of more expenses: You can deduct a greater amount of expenses related to the maintenance and management of the temporary rental, such as cleaning services, reservation management, etc.
5. Price adjustment to the market: In this model you can adapt the price to the market, as there is more rotation there are more price increases.
6. Greater legal certainty: Being regulated by the civil code, the owner has more rights than those established in the LAU

Disadvantages

1. Greater management and maintenance: Requires more active management, including cleaning and maintenance between stays.
2. Non-constant income: Occupancy can be unpredictable and vary depending on season and demand.
3. Additional costs: Advertising expenses, commissions to rental platforms, specific insurance, etc.
4. Waiver of the 60% deduction for habitual residence.

The law and the distinction between rentals

The Law 29/1994 establishes in its articles 2 and 3 that, although both rentals have the objective of satisfying the need for habitable housing by their residents, the main difference lies in the temporality and purpose of the rental.
In these articles, the requirement of temporality in relation to the occupation of the property is not defined by the duration of the contract but by the purpose of the contract.

The purpose and intention of the rental (temporary or permanent) will be taken into account as a defining characteristic to determine the type of rental to which the 60% reduction in the income tax return applies, in this case to permanent rentals.

Deductions are available for temporary rentals

There are expenses related to the temporary rental contract that can be deducted from the rent:

• Garbage charges, IBI
• Community expenses
• Extraordinary expenses
• Interest on mortgage payments
• Multi-risk home insurance
• Life insurance linked to the house
• Housing depreciation costs
• Advertising agency bills for rental advertisements
• Maintenance or general repairs of the building
• Furniture and decoration
• Utilities such as electricity, gas and water

In summary, understanding the details and implications of the rental deduction is essential to maximizing the tax benefit and avoiding potential legal complications.
If you are a property owner or are considering investing in the sector, it is important to be well informed and to seek professional advice if necessary.

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