Owners of empty rental properties in Spain find themselves with extra costs and fewer deductions after a recent Supreme Court sentence. The ruling states that the properties are liable for rental tax even if they were empty for the entire year. It’s estimated that thousands of buy-to-let owners in Spain are affected.
Yes to Tax on Attributed Income Tax and No to Deductible Expenses
The highest Spanish court has recently decided in the tax authorities’ favour and ruled that rental properties must pay attributed rental income. This applies even if the properties are empty and not earning their owners any income. The sentence also states that empty rentals may not deduct any expenses other than repairs and upkeep.
The rental tax and fewer deductions apply for all declarations made for the 2020 tax year and are as follows:
- All rental properties that have no tenants are liable for attributed income tax. This is a percentage of the property’s cadastral value and is either 1.1% or 2%.
- Owners of empty rental properties can no longer deduct the expenses generated by the rentals. These include utilities, council tax, insurance and community of owner charges.
- Mortgage interest deductions are also off the table for empty rentals during 2020 and cannot be included in tax deductions.
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The Sentence
In the words of the Supreme Court, “all properties with the exception of principal homes, have the potential to generate a return or income so are liable for tax at the minimum equivalent of 1.1% or 2% depending on the case”.
The sentence therefore considers that “income from property that is not let or sublet but is intended for rental must pay tax as attributed income”.
As regards deductible expenses, the Supreme Court says that the idea behind deductions is to reduce the income tax bill for the owner. However, if the owner receives no income from the property, deductible expenses cannot apply.
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All Rental Properties Affected
The ruling applies to all types of rental properties that were empty in 2020 for the entire year or part of it. It affects long-term rentals, holiday lets, premises and offices alike.
The owners of holiday lets in Spain will be particularly affected by this latest ruling. The vacation rental market was one of the hardest hit during mobility restrictions in 2020 and few holiday lets had bookings.
Refurbishment and Maintenance
The Supreme Court did not, however, include a ruling on deductible expenses for refurbishment and upkeep on a rental property. These remain in place for any work carried out to improve the rental or maintain its present state and may be included as a deductible expense in the 2020 tax declaration even if the property was empty.
The Costaluz Lawyers View
We believe that this latest sentence represents a blow to owners of buy-to-let properties in Spain. Even if a property is empty, it generates costs and expenses for the owners, many of which are usually offset in income tax declarations.
These owners now find themselves not only having to pay extra in tax but cannot use the property themselves because it’s available for rental purposes. In our opinion, the sentence comes at a particularly challenging time when many foreign property owners in Spain are facing financial difficulties because of the Covid situation.
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Maria Luisa Castro
