On May 24th, the Law 12/2023 for the right to housing was enacted. This law introduces changes in the tax benefits regime of the Personal Income Tax (IRPF), while establishing tax penalties for vacant properties.
These modifications will come into effect starting from the IRPF declaration for the year 2024.
Treatment of rental income in IRPF
Currently, there is a general tax benefit for property owners who have rental properties, consisting of a 60% reduction on the net income (income – deductible expenses) from the property. In other words, landlords who rent out a property do not pay taxes on the entire net income, but on 40% of the difference between income and expenses.
With the new regulations, this general tax benefit is reduced from 60% to 50%, thus generally affecting owners of rental properties.
The new regulations aim to encourage price reduction through improved incentives in certain cases, as explained below.
The new conditions for the tax treatment of rental income in IRPF are as follows:
- The net income will experience a 90% reduction if the current tenant of the property signs a new contract in one of the areas referred to as “areas of tense residential market” by the law, provided that the landlord reduces the price by more than 5% compared to the previous contract. However, the effect of inflation should be taken into account in case of price increases during that year.
- There will be a 70% reduction in net income in two situations:
-If the tenant is a young person renting the property for the first time and meets the required age range (between 18 and 35 years), and the property is located in a tense area. If multiple individuals share the property, the reduction will apply to the portion of the rent that meets these requirements.
-When the tenant is a Public Administration or non-profit entity (eligible for the non-profit entities tax regime) and the property is intended for social rental with a monthly rent lower than the one established in the rental assistance program of the state housing plan, or for accommodating economically vulnerable individuals as referred to in Law 19/2021 of December 20, which establishes the minimum income support, or when the property is covered by a public housing program or qualification through which the competent authority establishes a rent limitation.
- The net income will be reduced by 60% if the aforementioned requirements are not met, but the property has undergone rehabilitation in the two years prior to the signing of the lease agreement.
- Lastly, in all other cases, the reduction will be 50%.
It is important to note that these requirements must be met at the time of signing the contract, and the reduction will be applied as long as these requirements continue to be met.
It should be noted that, just like the current 60% reduction, these reductions will only apply to positive net income. In other words, if the deductible expenses result in a negative rental income, the reduction will not be applied.
Regarding tense areas, the competent housing authorities will be able to declare areas of tense residential market in those territorial areas where there is a special risk of insufficient housing supply for the population, under conditions that make it affordable for market access, according to different territorial needs.
Finally, it should be mentioned that, in the same way as in the current regulations, the reductions do not apply to the portion of positive net income derived from unreported income or improperly deducted expenses in the taxpayer’s self-assessment, which are regularized in any of the procedures mentioned in the previous paragraph. In other words, if the taxpayer does not correctly report the rental income in their tax return, they will not be able to take advantage of the tax reduction if the tax authority, in a subsequent review procedure (management review or tax inspection), regularizes the unreported or incorrectly reported income or expenses.
The reductions also do not apply to lease agreements that do not comply with the provisions of section 6 of Article 17 of the Urban Leases Law, which, in the new wording established by the Housing Law, states that in properties located in a tense residential market area, the rent agreed upon at the beginning of the new contract cannot exceed the last rent from the previous five-year lease agreement for the same property, after applying the annual rent update clause from the previous contract, and no new conditions can be established that impose on the tenant fees or expenses not included in the previous contract.
Tax penalties for vacant properties
Law 12/2023 also establishes the possibility for municipalities to impose an additional surcharge on the Property Tax (IBI) for permanently vacant residential properties.
A property is considered permanently vacant if it remains empty without justification for more than two years, according to the requirements, evidence, and procedures established in the corresponding tax ordinance.
In the case of permanently vacant residential properties, municipalities may require a surcharge of up to 50% of the net tax.
This surcharge can be applied to owners with four or more residential properties in multiple municipalities or to properties owned by individuals with two or more residential properties that are vacant within the same municipality.
However, the surcharge can increase up to 100% of the net tax when the vacancy extends beyond three years, and it can be adjusted based on the duration of the vacancy.
At addwill, we are available to provide further information and offer expert advice on this matter. You can contact us by phone at +34 934 875 200 or via email at info@addwill.eu, or by clicking here.