4 things to know about selling a rented house

Many homeowners choose to rent out their homes in search of profitable long-term returns. In view of the rising price of property for sale, however, many people choose to sell, even if the house is still being rented. Salvador Salcedo, partner at the law firm Ático Jurídico, offers the following advice:

1. The tenant has a preferential right to buy the house

Spanish law gives the tenant the right of first refusal to purchase the leased property if the owner wants to sell it. This means that the tenant can exercise their right of first refusal, which entitles them to buy the property for the same price that a third party would pay. The lessee has a period of 30 calendar days to exercise this right, with the period beginning from the moment the seller-lessor gives notice of the decision to sell.

If the landlord has managed to sell the house, the tenant also has another right: the right of withdrawal, which means that they can subrogate themselves in the place of the third-party buyer and under the same conditions.

However, these two rights do not always help the tenant, for example, in cases where the parties have previously agreed to waiver the lessee's right of first refusal if the property is sold, which is quite common. The current legislation allows the tenant to waive the right of first refusal without any limitation. Nonetheless, in the rental contracts prior to the modification of the Urban Leasing Law (Ley de Arrendamientos Urbanos or LAU) on 6th June 2013, this waiver shall be valid when the lease is for a period of more than five years.

2. The seller does not need to give notice of the sale to the tenant who waives their rights

The purchase and sale of the rented house may only be entered in the Land Registry if the seller-lessor has notified the tenant of their intention to sell. However, the seller does not need to give notice of the sale if the right of first refusal has been waived. The transaction can therefore be entered in the Register with the mere statement of the seller that the tenant waived their right, as established by the Directorate General for Registers and Notaries (Dirección General de Registros y Notariado).

3. The buyer is not always obliged to respect the rental contract

Property rentals must be registered in the Land Registry in order to remain in effect when third-party purchasers are involved, according to Spanish law. The buyer of a house which has a tenant in it is subrogated to the rights and obligations of the landlord if the rental agreement was entered in the Registry prior to the sale of the house. In this case, the buyer must respect the rental agreement.

However, if the lease was not registered, the provisions of article 1571 of the Civil Code, which states that the buyer shall be entitled to terminate the lease, unless otherwise agreed, shall apply. In this case, the tenant may demand that the new landlord let them stay for three months after they have been notified of the intention to terminate the lease, and that the seller-lessor shall pay them compensation for any damages suffered.

Salvador Salcedo points out that "the buyer of a rented property for use other than as a residence, according to our legislation, shall be subrogated to the rights and obligations of the lessor, unless they acquire in good faith, not knowing that the property is rented, and in this case they are entitled to terminate the lease. The registration of the leasing contract will prevent the termination of the lease as the buyer cannot claim that they were unaware of the existence of the leasing relationship.”

4. Taxation on the purchase and sale of a rented house

Salcedo reminds us that one of the expenses deductible from rent for the lessor in the Spanish income tax returns (Impuesto sobre la Renta de la Personas Físicas or IRPF) is the amortisation of 3% of the value of the property while the lease is in force. This depreciation is ultimately the loss in value suffered by the property over time.

When a rented property is sold, the minimum depreciation that should have been applied during the time the property was rented must be deducted from the acquisition value for the purposes of calculating the IRPF. This is so even if the seller-lessor has not deducted this from their income tax returns, the return of which they may request with respect to periods not prescribed.

Although the seller-landlord can make a profit thanks to the deductions made before the sale of the rented house, this profit is compensated by the increase in the capital gains obtained from the sale of the property that will have to be declared in the IRPF and that will be produced as a result of subtracting the value for which the property was purchased. In other words, it all comes out even in the end and "what goes around comes around," as Salcedo says.