Rental deduction is an issue that raises a number of questions for landlords when faced with the income tax declaration (IRPF).

It is crucial to understand which rental types are subject to the well-known 60% reduction and which expenses can be deducted depending on the type of rent.
This can make the difference between a legal and prudent deduction of rent and some unexpected surprises.

What is income tax (IRPF)?

Personal income tax, or IRPF, is a tax liability that taxes the income of individuals during a tax year, taking into account their gains and losses.
The Tax Administration publishes an annual table that determines the percentage applicable to taxable income, i.e. net income after deducting family minimums, pension contributions and other aspects..

Rent in personal income tax

It is important to understand that rents are part of the tax base and that operating expenses are deductible.

The deduction for housing varies according to the type of rental:
– 60% of the income in the case of permanent housing.
Temporary rental, the deduction is zero, except in the case of temporary corporate rental or legal entity where the lessor is a natural person and the rental is for the home of a natural person specified in the contract (employee of the company/legal entity).

In the case of permanent housing, the income received is taxed at the marginal rate, which varies according to the economic situation of the taxpayer.
In order to determine the tax rate, it is necessary to know the taxpayer’s income level.

Examples and marginal income tax rates

The marginal tax rates by income bracket are the rates that apply to any additional income over and above the existing income.
A person with a low income will hardly benefit from the deduction, while a person with a high income can make a significant saving of an additional 10% on their income and obtain much more security, benefits and peace of mind.

In the case of permanent housing, the income is taxed as “Rendimientos del Capital Inmobiliario”, which are defined and published each year by the Tax Agency.

Example 1. If a low income is declared, the applicable rate would be “0”, the deduction of 60% of the income generated would be “0” euros and therefore there would be no saving.

Example 2.
If the income is high and the marginal tax rate is 50%, the saving is 50% of the applicable 60%. A considerable sum.
In other words, if the annual income is 20,000 euros, 10,000 euros would not be taxed and the saving would be 6,000 euros of this 10,000 euros.

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.

Temporary rentals and tourist rentals do not qualify for the permanent rental deduction.

Deductions 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 maximise the tax benefit and avoid 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.

More information for investors and homeowners in Madrid

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