Tax Returns 2017: when a landlord can benefit from a tax reduction for rentals and how not to lose it

In a market in which there are more and more owners who rent out their properties, it is important to know in which cases the landlord can benefit from the 60% reduction for rent. However, it is also possible to lose the right to this reduction.

The tax reduction for rent as prescribed in the Personal Income Tax Act (Ley del Impuesto sobre la Renta de las Personas Físicas or IRPF) is 60% and is calculated on the positive net income obtained from renting out a property. José María Salcedo, a partner at Ático Jurídico, assures that first it is necessary to determine what the net income is. "To this end, we will deduct from the income obtained the expenses provided for in article 23, paragraph 1, of the Personal Income Tax Act, provided that they are related to the property being leased, obviously, or have been necessary to obtain the income from the rental," he adds.

Which landlords can benefit from this reduction?

Not all landlords are entitled to this reduction. The property being rented out must be used as the tenant's residence and not for any other purpose. For example, in cases where the property is rented out as a professional office or as the headquarters of a company, the right to the reduction does not apply.

In addition, the income obtained must be taxed as a return on real estate capital, and not as an economic activity.

Salcedo reminds us that, in accordance with the provisions of Article 27.2 of the Personal Income Tax Act, the rental of real estate shall be considered an economic activity if at least one person employed on a full-time basis is used to manage it.

"In this case, the income obtained will be taxed as an economic activity, and there will be no right to apply the 60% reduction. This only happens in the case that the taxpayer obtains returns from the real estate capital," Salcedo points out.

What happens if the property is rented to a company to house its employees?

Occasionally, the tenant can be a company, but the use of the property will not be as an office or headquarters of the entity, but rather as the home of one of its employees. Could the landlord apply the tax reduction in such cases?

The answer is yes. The Central Economic-Administrative Court (Tribunal Económico-Administrativo Central or TEAC) has declared that what is important is what the property is destined for and that, if the purpose is precisely for this, it is possible for the landlord to apply the reduction, even if the tenant is a company.

However, the rental contract must state that the property will only be used for housing and mention the specific individual who will occupy it.

What about renting to a charity that donates it for housing?

Something similar happens if the property is rented to an NGO or charitable organisation, as long as the property is not used as the office or headquarters of the entity. It is common for some NGOs to rent property, and then transfer it to people who are in need or in special protection groups.

In this case, José María Salcedo considers that the intended use of the property should also be taken into account. "It is true that it will be much more complicated in this type of lease to identify the people who will actually occupy the property, but we believe that the end goal should prevail, considering that the property is going to be used as housing, and the reduction should be accepted," he concludes.

When can the right to a tax reduction be lost?

The right to apply the reduction may be lost if the taxpayer does not include the income and expenses obtained from the rental of the property in their income tax return.

"It doesn’t matter whether the income received is declared on time or not, as long as a tax audit has not been started. That is to say, the taxpayer can make an assessment if they forgot to declare the income and, in this way, apply the reduction," says the lawyer.

However, if a tax audit is initiated and this income has not been declared, the approach of the Hacienda tax office is to consider that the taxpayer may no longer claim the reduction as part of the audit.

"In any case, we are faced with an administrative judgement, which does not have to be shared by taxpayers. In fact, the Supreme Court of Justice of Madrid has considered, in a recent ruling, that the TEAC approach involves imposing a double sanction on the taxpayer: on one hand, the application of the reduction will be denied. On the other hand, you will normally be penalised for having incorrectly included this reduction in your income tax return. In short, the Madrid Court of Justice considers that it would be possible to request the application of the reduction, even if a tax audit had been initiated," Salcedo points out.

Therefore, the lawyer advises appealing the case in the event that the tax office refuses to apply the reduction, for the reasons mentioned above.