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DEDUCTIONS AND REDUCTIONS APPLICABLE TO PERSONAL INCOME TAX ON INCOME FROM RENTING OUT A RESIDENTIAL PROPERTY

When a property is let, the owner or, alternatively, the usufructuary must declare the total income received in their income tax return. The regulations allow for a number of expenses to be deducted, as detailed below:

1. Interest and other financing costs for borrowed capital invested in the acquisition or improvement of the asset, right or entitlement to use or enjoyment.

This includes loan interest, origination or processing fees, and other expenses related to financing or cancellation.
The maximum total amount deductible for interest and other financing costs (together with the maintenance and repair expenses mentioned in the following section) may not exceed, for each asset or right, the amount of the gross income obtained. Any excess may be deducted in the following four years.

2. Maintenance and repair expenses.

These are expenses incurred to maintain the normal use of real estate, such as painting, plastering or repairing installations, and the replacement of elements, such as heating systems, elevators, security doors or others.
Amounts allocated to the expansion or improvement of the property are not deductible under this heading, as they constitute an increase in the acquisition value, the recovery of which is effected through the corresponding depreciation charges.

3. Taxes, surcharges and fees.

This includes taxes and surcharges that are not levied by the central government, as well as state-level fees and surcharges. For example: property tax (IBI), garbage collection fees, etc.

4. Amounts accrued by third parties as a result of personal services.

For example: administration, security, concierge, garden maintenance, etc.

5. Lease formalization and legal defense expenses.

This includes fees paid to professionals for drafting and formalizing the lease agreement and attorney and legal representative fees in the event of disputes with the tenant (non-payment of rent, breach of contract, etc.).

6. Doubtful debts.

These will be deductible when the risk of non-collection is duly justified. To qualify, at least one of the following requirements must be met:

- The debtor is subject to insolvency proceedings.
- More than six months must have elapsed between the taxpayer's first collection attempt and the end of the tax period, and the debt must not have been renewed.

When a doubtful debt is collected after its deduction, this income must be declared in the tax year in which the collection takes place.

7. Insurance premiums.

These can refer to home insurance, liability insurance or rent guarantee insurance, provided they cover the assets or rights that generate the income.

8. Services or utilities.

Amounts spent on services or utilities, such as water, electricity, gas, internet, etc., are deductible if they have been incurred and paid for by the landlord.

9. Other necessary tax-deductible expenses.

In addition to the expenses specifically listed above, any other expense is considered tax-deductible provided that it is necessary for the generation of the corresponding income.

10. Amounts allocated to depreciation.

Depreciation reflects the loss of value of real estate and other assets transferred with it due to use or the passage of time.

In the case of real estate, annual depreciation may not exceed 3% of the higher of the acquisition cost (excluding the land) and the cadastral value of the building. For fixtures, fittings and equipment, the limit is 10% per year.

Regarding the expenses listed, they will only be deductible for the period during which the property was rented and generating income, in proportion to the corresponding income-expense matching principle. However, maintenance and repair expenses will be deductible even if they were incurred while the property was not rented, provided they were carried out for the purpose of renting the property and not for the owner's personal use.
Furthermore, if the property was only partially rented, only the expenses proportional to the rented portion will be deductible.

A reduction may be applied to the net income remaining after deducting the aforementioned expenses. This reduction will vary depending on which of the following requirements are met:

• A 90% reduction when the same landlord has entered into a new lease agreement for a property located in a high-demand residential market area, where the initial rent has been reduced by more than 5% compared to the last rent of the previous lease agreement for the same property, after applying, where applicable, the annual adjustment clause of the previous contract.

• A 70% reduction when any of the following circumstances take place:
- The taxpayer is renting the property for the first time, provided it is located in a high-demand residential area and the tenant is between 18 and 35 years old.
- The tenant is a public administration or non-profit entity that uses the property for social housing.

• A 60% reduction when the property has undergone renovation work, provided that the work was completed within the two years prior to the date the lease agreement was signed.

• A 50% reduction in all other cases.

When purchasing a home, the associated expenses must be considered.The main expenses are detailed below.

1. Taxes:

- Value Added Tax (VAT).
This is due on new construction and the first transfer. It is generally taxed at 10% and 4% on social housing.

- Property Transfer Tax (ITP).
This is due on second or subsequent transfers.It varies by Autonomous Community. In Catalonia a progressive rate is applied based on the value of the property: 10% up to the first €600,000 €, 11% on the excess up to the next €300,000 €, 12% on the excess up to the next €600,000 € and 13% on the remaining excess.
The rate is reduced to 7% for social housing and to 5% when the buyer meets certain requirements.

- Stamp Duty (IAJD).
There are two fees: one fixed and one variable.
The fixed fee refers to the stamped paper on which notarial documents must be issued and amounts to €0.30 per sheet and €0.15 per page.
The variable fee depends on the Autonomous Community.In Catalonia it is 1.5% of the property's value.
For new-build properties sales both the fixed and variable fees must be paid, while for second-hand properties sales only the fixed fee must be paid.

- Municipal capital gains tax (Tax on the increase in the value of urban land).
According to regulations, this tax must be paid by the seller, although it is possible to agree otherwise.

2. Notary Fees:

The purchase and sale must be formalized by public deed before a notary. Notary fees are regulated by law and vary depending on the price of the property. They typically range between 0.2% and 0.5% of the purchase price.

3. Property Registry Fees:

Once the deed is executed, it must be registered in the Property Registry, whose main function is to guarantee legal security and provide greater protection to the owner. Fees are also regulated by law and vary depending on the price of the property. They amount to between 0.10% and 0.25% of the purchase price.

4. Mortgage costs (if financing is available):

- Property appraisal:
This will be carried out by a company approved by the Bank of Spain and usually costs between €300 and €500.

- Mortgage arrangement fee:
This is a charge that banks apply at the outset to cover administrative, assessment and management costs. It usually ranges between 0.5% and 1% of the loan value.

- Home and/or life insurance:
By law it is only compulsory to take out home insurance with coverage for damage caused by fire, flooding or natural disasters. However, banks recommend taking out other types of insurance, such as life insurance.

Below we'll share some practical ideas and tips you can follow to boost the value of a home you're planning to sell.

1. Neutral colors in paint.

An easy and inexpensive way to create more spaciousness and light in the rooms of a home is to use neutral colors with low saturation tones and without a dominant primary color, such as white, light gray, or beige. They are characterized by their warmth and elegance, allowing them to create a serene and welcoming atmosphere and are ideal for achieving a minimalist look.

2. Order and cleanliness.

A tidy home optimizes the use of space, making it a more pleasant and functional place and contributing to the well-being of those who live there. Likewise cleanliness in a home is essential to convey peace and tranquility and create a healthy and positive environment that helps visitors imagine themselves living there.

3. Lighting.

You can improve the value of a property by following some simple lighting tips, such as maximizing natural light to make rooms feel more spacious using mirrors and light curtains that reflect and transmit light, using warm and neutral light bulbs that encourage relaxation and rest, installing auxiliary lamps that help illuminate areas of the home that the main light fixture doesn't reach and also decorate the home, etc.

4. Plants.

Introducing plants adds a touch of color and vitality to the home.They're also beneficial for your physical and mental health as they help purify the air, increase humidity, absorb noise and reduce stress.
On the other hand they're an additional decoration and adornment for the home.
So there are only advantages, although it is advisable to select the most suitable plants according to the characteristics of each space where they will be placed.

5. Clear spaces.

Keeping rooms clear and organizing the space helps create a sense of greater spaciousness. It's essential to find a balance when arranging furniture. It is advisable to remove or hide unnecessary objects and items that do not contribute anything, avoid overloading the rooms and use furniture with clean lines, prioritizing simplicity, functionality and harmony. The goal is to create a calm, tidy and welcoming environment.

In short, you don't need to make large investments to improve the value of your home. Just follow these tips.

Taking out a mortgage is a very important financial decision and multiple factors must be considered before making a decision. Here is a list of the main issues you should consider:

1. Mortgage type.

• Fixed rRate: The interest rate remains unchanged throughout the term of the loan. It offers greater stability but usually has a higher initial interest rate.
• Variable rate: The interest rate varies based on the reference index (usually the Euribor). The initial installment is lower but there is a risk of interest rate increases.
• Mixed rate: Combines an initial fixed-rate period with a subsequent variable-rate period.

2. Interest rate.

• APR (Annual Percentage Rate): Includes not only the nominal interest, but also fees and other charges.It is the most reliable indicator for comparison.
• NIR (Nominal Interest Rate): This is the "pure" interest, without any additional charges.

3. Monthly installment and capacity payment.

• It is advisable to consider and analyze how the installment would be affected by possible interest rate increases if you choose a variable-rate mortgage.
• You should ensure that the monthly installment does not exceed 30-35% of your net income.

4. Repayment term.

• The longer the term, the lower the payment, but the more interest you'll pay overall.
• Choose a term that allows you to live comfortably without overpaying in the long run.

5. Fees and associated expenses. 

• It is advisable to find out about the fees for opening the mortgage, early repayment (repaying part or all of the loan capital ahead of schedule), subrogation (transferring the mortgage to another bank to obtain better terms), novation (changing the conditions with the same bank), etc.
• Under the new Mortgage Law many of the fees associated with a mortgage must be covered by the bank (such as Notary fees, Property Registry fees and administrative fees).

6. Linked products.

• Some banks offer better terms if the buyer takes out insurance, credit cards, pension plans, etc.
• Consider whether you really need these products or if they make the mortgage more expensive in the long term.