The Supreme Court has eased the tax burden on private owners of rental properties — provided they are individuals and not companies — by improving their tax situation if they decide to sell such properties. According to lawyer Alejandro del Campo, from the firm DMS Legal, the ruling will benefit many landlords in the Balearic Islands.
The decision, issued last November, puts an end to the method previously applied by the tax authorities to calculate the capital gains obtained from the sale of rental properties. This formula, according to the tax expert, had for many landlords been “bread for today and hunger for tomorrow”.
Tax calculation method
Under the current system applied when filing an annual income tax return, private owners of rented properties must declare the profits generated by those assets. This involves reporting the rental income received, while being able to deduct certain expenses, such as community fees, waste collection charges, property tax (IBI) and documented repair costs. In addition, taxpayers may apply a 3% annual reduction to the value of the building — not the land — as depreciation.
In many cases, however, this 3% depreciation allowance represents only a limited tax advantage for individual taxpayers. This is because, in addition to having already reduced taxable income through deductible expenses, long-term rental income also benefits from a 50% reduction when calculating taxable income. As a result, the amount payable in income tax under this concept is significantly reduced.
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