Tax deductible expenses applicable to the rental and sale of real estate
As a general rule, to determine one’s net tax liability with regard to the rental of real estate it is possible to deduct from the gross rental income received all those expenses that are necessary to actually produce the rental income itself.
Generally, one can consider as a tax deductible expense the interest that accrues on borrowed capital used to acquire or improve the property and other costs arising from such finance, the costs and expenses incurred in the maintenance and repair of the property. Also the taxes that are paid with regard to the property that produces the rental income with the exception of those surcharges or fines that are paid as a penalty, the costs and expenses incurred in the normal maintenance of the property (painting and repair of installations) and the replacement of elements such as the heating, lift, security doors amongst others. Obviously the total cost of the expenses and costs incurred by the owner cannot exceed the actual gross income generated from the rental of the property itself.
With regard to the sale of a property, the price of sale for capital gains tax purposes is determined by the real price of sale of the property minus the amount of the costs and taxes that are inherent to the sale which are legally the vendor’s liability such as the local plusvalia tax charged by the Town Hall. Therefore, one can deduct all those taxes paid as long as by law the recognized tax payer is the vendor.
The local plusvalia tax, or to give it its full name the tax on the increase of the value of urban land, is a municipal tax charged by each town hall on the sale or transfer of real estate. A national tax statute establishes the right of the local town halls to charge the said tax which is then normally regulated in detail in each municipality by local bye-laws. However, as a rule it is calculated on the basis of the rateable value of the property and the number of years that the property has been owned by the vendor. The tax supposedly charges the increase of the value of the land upon which the property is built and uses the property’s rateable value as a tax base and also takes into account the years during which the property has been owned by the vendor.
However, the legal regulation of the plusvalia tax has been recently challenged by a ruling from Spain’s Constitutional Court dated 11th May 2017 which establishes that the automatic taxation levied by means of the plusvalia tax is not legal in those cases in which there has not actually been a real increase in the value of the land transmitted. The fact that during Spain’s financial crisis many transmissions of real estate were made with regard to which no effective increase of value of the land had been produced lead to the legal challenge with regard to the automatic levy of the plusvalia tax on the simple basis of the period of ownership and lead to the ruling referred to above which establishes that for the tax to be charged, an actual real in- crease in the value of the land transmitted must be produced.
The actual wording of the said ruling is ambiguous and refers to the fact that only a national act of legislation may regulate when there an increase of value is produced and that after the ruling the modifications or amendments to the legal regime of the tax should be made to ensure that the plusvalia tax is not applicable in those cases in which there is an absence of an increase of the value of the land transmitted.
At the moment, the corresponding articles of the national statute that regulates local taxes have been annulled and one would hope that shortly an amendment of the said articles will be published so that the plusvalia tax is only applicable in those cases in which the vendor of a property has seen a justified and evident increase of value in the land sold.