Tax de­ductible ex­penses ap­pli­ca­ble to the rental and sale of real estate

Costa Levante News - - RESIDENTS' ADVISE DESK - Le­gal and Tax ad­vice from Fernando Aliaga

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.

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