No more 60% tax reduction for owners of holiday rental apartments

Until now, owners of holiday rental properties have been able to enjoy a 60% reduction in their income tax rate. However, the Hacienda (the Spanish tax office) and the Central Economic Administrative Court (Tribunal Económico Administrativo Central or TEAC) have ruled that this tax benefit does not apply to seasonal rentals, but only to traditional rentals because they are not the habitual residence of the tenants.

It’s a blow for property owners who rent out the flats to tourists. On 8th March, the TEAC issued a resolution against seasonal rental owners benefitting from the 60% reduction in their personal income tax (Impuesto sobre la renta de las Personas Físicas or IRPF). It unifies criteria, thus linking the entire Tax Administration.

Behind the TEAC’s decision is the Administrative Economic Court of Andalusia (Tribunal Económico Administrativo de Andalucía or TEAR), which at one time upheld the claim of a taxpayer who owns a tourist flat, on the understanding that the IRPF Law in its Article 23, which regulates the reduction, refers only to the rental of real estate for housing, so it does not distinguish whether it should be habitual or not.

The Tax Agency appeals this resolution of the TEAR of Andalusia and refers to the concept of housing under the Urban Leasing Law (Ley de Arrendamientos Urbanos or LAU) to prevent owners of tourist flats from enjoying the reduction of 60%. In his opinion, article 2 of the LAU should be applied, which states that a property lease is one that is intended to satisfy the tenant's permanent need for housing. In this way, seasonal rentals (regulated in article 3 of the LAU, as rentals for non-housing use) are avoided and rentals intended for permanent and habitual residence are preferred.

With all this, the TEAC agrees with the Hacienda and reiterates the idea that it is necessary to refer to the LAU’s concept of property rental, but adds another argument: the concept of a main residence in the IRPF for the purposes of deductions for housing requires that it be a habitual residence. This court considers that it does not make sense that in the IRPF law, the habitual character of the property is a requirement for the housing tax deduction but not for the reduction for rentals.

The TEAC's resolution is also based on two judgments handed down by the High Court of Justice of the Balearic Islands (Tribunal Superior de Justicia de las Islas Baleares), and that of Andalusia, which both also consider that the concept of renting a home in the Urban Leasing Law should be taken into account. For this reason, according to José María Salcedo, partner of the law firm Ático Jurídico, "it seems difficult in principle that other courts can maintain a different criterion, allowing the reduction to be applied".

The reduction for rent provided for in the IRPF Law is 60% and is calculated based on the positive net yield obtained from renting a property. José María Salcedo assures us that first we have to determine what the net yield is. "It is calculated by deducting from the income obtained the expenses provided for in article 23, paragraph 1, of the IRPF Law, provided that they are obviously related to the leased property, or have been necessary to obtain the income from the rental," he adds.

Other expenses which do have a deduction

There are many expenses related to tourist housing that can be deducted by the owner in the tax return, as Rentalia, the holiday rental portal of the idealista group, recalls. However, you can only deduct them in relation to the period of time the property has been rented. This means that the more weeks you rent your home to tourists, the more expenses you can deduct:

• Repair and upkeep costs of the property (excluding extension and improvement work)
• Property Tax (Impuesto sobre Bienes Inmuebles or IBI), community expenses and rubbish tax
• Mortgage interests and property depreciation expenses
• Insurance to cover housing risks
• Expenses of mediating agencies or advertisements
• Bills for electricity, water, gas, etc.
• Other expenses duly justified and directly related to the rent.

The deduction for interest, financing, repair and maintenance costs may not exceed the amount of the total income obtained.

Which landlords can apply the 60% reduction

To begin with, the rented property must be used as the tenant's home and not for any other purpose. For example, the renting of a property for the office of a professional, or to constitute the headquarters of a company, does not generate the right to apply the reduction.

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

José María Salcedo reminds us that if the lease is taxed as an economic activity in the income tax, the reduction cannot be applied. In accordance with the provisions of article 27.2 of the IRPF Law, the rental of real estate shall be considered an economic activity if at least one person employed on a full-time basis is used for its management.

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