It is a very common practice, amongst both foreigners and nationals, to rent out a second property that they don’t use for a certain period of the year to generate extra income and cover costs. However, this practice results in certain tax obligations for the owner in Spain, which we will aim to clarify in this post.
There are a number of different situations to consider:
1) If you receive rental income from a property in Spain but are not a Spanish resident (e.g. if you rent out your holiday home during the rest of the year when it is not in use).
2) If you receive rental income from a second property, in Spain or abroad, and are a Spanish tax resident.
3) If you reside in Spain but rent part of your own home out to holidaymakers.
Non-residents who rent out their holiday homes
The rental income of non-residents should be declared in Spain even it is properly declared in the country where you are a tax resident (e.g. the UK which does expect its residents to declare any income from holiday rentals). To do this you would have to file it through Non-Resident Income Tax (IRNR), which we talk more about in our post “Non-Resident Income Tax: What is it and why do I have to pay it?”, by submitting Form 210 quarterly.
If the rental property is jointly owned with someone else (e.g. your spouse) both are obliged to submit forms.
The details of the renters will have to be included in the declaration, as well as the amounts received and any deductible expenses (e.g. community fees).
One issue that can occur with non-resident rentals is that the property is only rented out for part of the year, maybe even only a few weeks in the summer. In this case the rent must be declared in the manner described above but the period during which there is no rental is also subject to a separate tax under Non-Resident Income Tax, applicable just for owning property in Spain. There is more information on this in our previous post.
It is important to mention that UK taxpayers who declare the income on both their Spanish and UK tax returns can make a double tax claim to prevent them being taxed twice. This claim is made on the UK return and will be equal to the Spanish tax paid or the UK tax liability, whichever is the lower of the two amounts.
Spanish tax residents who rent out a their second property
If you have a property you rent out in Spain and are a Spanish tax resident yourself, you will have to declare the rental income when you file your regular Spanish Income Tax return (IRPF) each year, in the May/June period following the year of the rental (i.e. in arrears).
The tax treatment is fairly favourable:
- There are a number of deductible expenses (e.g. utilities, advertising and legal costs, community fees, interest and depreciation of the property, etc.)
There is a 60% deduction if the property is rented out as a dwelling (as opposed to a business)
Even if the rental property is not in Spain, but abroad, the same rules and deductions apply. If the rental income has already been taxed in the country where the rental property is located and the amount of tax is higher than what you would pay in Spain, it has in the past been common practice to not declare it on Spanish tax return, as no tax would be due. This has been the traditional approach regarding UK property, particularly due to the difficulties created by the different endings to the tax year in the UK and Spain. However, in the light of the new overseas asset reporting requirements introduced in 2012, it is advisable in future to include the income and the tax paid on your Spanish tax return, even if no tax results.
Any owner who fails to declare their rental income should be aware that this is one of the Spanish Tax Authority’s biggest targets for cracking down on tax evasion and the consequences can be quite severe if caught. One of the measures introduced to catch out landlords was to make it a rule that any renter claiming a tax deduction for rent paid must include the details of the owner on their tax return. This allows the Spanish Tax Authority to crosscheck with their records to find out if the owner is declaring the rental income.
Spanish tax residents who rent out part of their own home
Many people who settle in Spain make extra money by running a holiday rental business based in their own property (e.g. converted outbuildings). The tax rules are more or less the same as those described above.
There are, however, a couple of points to keep in mind on this subject:
- All claims for deductible expenses must relate solely to the rental (e.g. you can’t rent out an annex for a few weeks and subsequently claim every item of household expense for the entire year). Furthermore, if you live in the property it will be very difficult to claim anything for utilities or taxes, for example, as these would have been payable anyway as you live there and you will not be able to apportion bills.
- Other issues can arise when the rental turns into a business. For instance, if you begin running a holiday business from your property which involves more than just renting out accommodation then you should register as self-employed. There is a grey area between renting out and running a business, but the distinction is usually made on the basis of what extras are included for the renter.
All of these cases can have severe implications if not managed properly, which is why we recommend you seek advice from professionals specialised in Spanish tax issues.
Gabriella Mary Trussler
4408 Ilustre Colegio de Abogados de Almería