What is considered an income from real estate for Spanish taxes?

Returns on Real Estate Capital in Spain: A Detailed Explanation

1. What is considered “earnings on real estate capital”?

“Earnings on real estate capital” in Spain refer to the income generated from the leasing of rural and urban properties, as well as income derived from the creation or transfer of rights related to the use or enjoyment of these properties. This can include various forms of rental income, whether it’s from leasing a property for residential, commercial, or agricultural purposes, or from selling rights to use the property, such as easements.

Types of Income Included

The income considered under this category includes all payments received from the lessee or sub-lessee. These payments are for the use of the property and any assets assigned to it, such as furniture or equipment. Importantly, the income considered does not include VAT (Value Added Tax) or IGIC (Impuesto General Indirecto Canario, applicable in the Canary Islands).

2. How is the net return on real estate capital determined?

The net return on real estate capital is calculated by subtracting tax-deductible expenses from the gross income generated by the property. This calculation process helps determine the actual amount of income that will be subject to taxation.

Calculation Process:

• Gross Income This is the total income received from the rental or use of the property.
• Deductible Expenses These are expenses incurred that are necessary to generate the rental income. Once these are subtracted from the gross income, the result is the **net return** on real estate capital.
• Reductions After determining the net return, certain reductions may apply, which further reduce the taxable amount. The resulting figure is the **reduced net return on real estate capital**.

3. What expenses are deductible?

When calculating the net return on real estate capital, certain expenses can be deducted from the gross income to reduce the taxable amount. These deductible expenses include:

– Necessary Expenses

Any expense that is necessary to obtain the income is considered deductible. This includes:

• Amortization

  This refers to the gradual reduction in the value of the property over time due to wear and tear. The amortization of the property itself, as well as any assets associated with it, can be deducted.

• Maintenance and Repairs

  : Costs related to the upkeep and repair of the property, provided these are necessary to maintain the property’s income-generating potential.

• Financing Expenses

  Interest on loans taken out to acquire or improve the property can also be deducted, but with limitations.

– Non-Deductible Expenses

Not all expenses qualify for deduction. For instance:

• Losses from Claims: Payments related to claims, such as fire damage, that result in a decrease in the property’s value are not deductible. These are treated as capital losses instead.
• Personal Expenses: Expenses not directly related to the income, such as renting a house for personal convenience, are also non-deductible.

– Limitations

There’s no maximum limit for most deductible expenses. However, there is a cap on the deductibility of interest and other financing expenses, as well as repair and maintenance costs. These cannot exceed the total income generated from the rental of the property.

If these expenses exceed the income from the property, they can be carried forward and deducted in the following four years.

4. What reductions are applicable to net returns?

After determining the net return, certain reductions can further decrease the amount subject to tax:

– General Reduction

– Long-Term and Irregular Income

Net returns that have been generated over a period of more than two years, or those considered irregular, can be reduced by 30% if they are taxed in a single tax period. This applies, for example, to compensation received from a tenant for damage to the property.

– Reduction Cap

The reduction applies to net income up to a maximum of 300,000 euros per year.

– Special Reduction – Rental of Residential Property

If the property is rented out as a residence, the net return can be reduced by 60%. This reduction applies only to income that the taxpayer has declared, promoting transparency in rental income reporting.

5. Withholdings on real estate capital yields

In Spain, income from real estate capital is generally subject to withholding tax, which is an advance payment of tax to the authorities:

– Withholding Rates

– Up tp 2015: The general withholding rate was 20%.
– Post-July 12, 2015: The rate was reduced to 19.5%.

– Exemptions from Withholding

– Employee Housing:  When companies rent housing for their employees, withholding may not apply.
– Low Rental Income: If the total rent paid by a tenant or to the same landlord does not exceed €9,000 per year, withholding may be waived.
– Certain Landlords: Landlords who are taxed under specific categories of the Economic Activities Tax (IAE) may also be exempt from withholding, especially if the properties they lease have a cadastral value exceeding 601,012.10 euros and fall under specific IAE categories that relate to property leasing activities.

Conclusion

Understanding the nuances of returns on real estate capital in Spain is crucial for property owners and landlords. From determining what qualifies as earnings, calculating net returns, understanding deductible expenses, and knowing which reductions and withholdings apply, this knowledge helps in managing tax obligations effectively. Whether renting out residential or commercial properties, it is essential to stay informed about the latest tax regulations to optimize returns and ensure compliance with Spanish tax law.

Source: Spanish Tax Calculator