Recent Supreme Court decision on property ownership and due taxes

Supreme Court decision on property ownership and due taxes - Costaluz Lawyers

The Spanish Supreme Court was recently asked with objective interest for the formation of Case Law to make a decision on imputed income from property in Spain. Non-resident owners of real estate are liable for deemed income on their property that is not let, but is intended to be. The request to the Supreme Court was to determine whether this deemed amount should be taxed as income from real estate capital or as imputed income.

Find out what your non-resident tax obligations are in Spain

Supreme Court decision on how it should be taxed

In relation to whether income from real estate, which is not let or sub-let but which is intended to be so, is taxed as real estate capital gains or as imputed income, the Supreme Court has ruled that such income must be taxed as imputed income.

The Court understands that any property that is not the owner’s primary residence, has the potential to generate an income. As a result, this deemed income is taxed as part of personal income tax at a rate of 1.1% or 2% of the cadastral value.

This minimum taxation is therefore imposed on non-let properties, other than a primary residence, that do not generate capital returns. This is without the applicable regulations referencing the fact that such properties may potentially generate income for their owners or that they are expected to be let, even when temporarily vacant.

This decision contradicts the criteria of the Supreme Court in the Comunidad Valenciana. For its part, it stated that it is not legal to impute such income in the months that the properties could not be let, despite the expectation that they would be.

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Supreme Court decision on possibilities of reducing expenses

A decision was also required on whether expenses associated with the properties should be deductible according to one of the following criteria:

  • Deductible only and exclusively for the period during which the property was let and general income and in the corresponding proportion.  
  • Deductible for the entire tax period regardless of whether the property was actually let.

Spanish income tax law states that only the expenses necessary to obtain the income are deductible. Therefore, if the property is not let, it does not generate full income.

However, the owner must pay annual expenses such as council tax, insurance, community expenses, and utility supplies regardless of whether the property is let. These expenses are therefore not necessary to obtain income from tenants.

The purpose of deducting expenses is to reduce the tax burden on the owner, who is liable for income tax on income derived from letting. Therefore, if the owner receives no rent in the fiscal year or part of it, it is not possible to deduct expenses attributable to that period.

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