NEWS ON THE REDUCTION FOR HOUSING RENTALS
Patrick2024-10-18T05:10:50+00:00From 2024, important new features are introduced in the reductions for rental housing applicable to personal income tax on net income from rental housing.
See what these changes consist of.
New law in 2024
Until 2023, the IRPF law allows a 60% reduction to be applied to the positive net yield obtained from renting property intended to cover the tenants’ need for permanent housing [LIRPF, art. 23.2].
However, the new Law on the Right to Housing has introduced changes to this reduction from 2024, moving from the current fixed reduction of 60% to percentages of between 50 and 90%, which vary according to the specific situation [Law 12/2023, DF 2.ª] .
What is a reduction in personal income tax?
Let’s start at the beginning, what is a personal income tax reduction?
The reduction is aimed at the owner and means that the amount you pay tax on is reduced.
That is to say, if for example, you have received €1,000 for renting a property, with the 50% reduction you will be taxed on €500.
You can of course deduct the expenses you have incurred in renting out your property.
In the 2024 income tax, if you fulfil certain requirements, your reduction for renting out your home can be 50%, 70% or up to 90%.
Let’s see below what are the requirements to qualify for this reduction.
Reductions in personal income tax for renting a house.
New reductions in personal income tax for renting a home
90% reduction
In the first place, a 90% reduction will be applicable to rentals that meet the following requirements [LIRPF, art. 23.2.a] :
- The housing must be located in stressed residential market areas (the Ministry of Transport, Mobility and Urban Agenda must issue a resolution specifying these areas).
- A new rental contract (with the old tenant or with a new one) shall be formalised, in which the initial rent is reduced by more than 5% in relation to the last rent of the previous rental contract for the dwelling.
When quantifying the amount of the new rent entitling you to the 90% reduction, please take the following into account:
- The 5% discount must be made in relation to the last rent of the previous rental contract for the same dwelling, after applying – if applicable – the annual updating clause of the previous contract.
- The discount is only due in respect of the initial rent, so that if in subsequent years the rent is updated according to the applicable discount index so that the discount is no longer more than 5 %, the 90 % reduction is deemed to be maintained.
- The landlord (owner) signing the new contract must be the same as the one who signed the previous contract, so this reduction would not apply if the new contract is signed by a new owner who has acquired the property either by inheritance, gift or purchase.
Example 1
You have a rented property located in an area considered to be under stress for which you receive a rent of €990 per month.
Well, in 2024 you formalise a new rental contract with another tenant and agree on an initial rent of €939 per month, which represents a discount of 5.1%, you will be entitled to the 90% reduction.
Reduction of 70%.
If you do not qualify for the 90 % reduction, you can apply for a 70 % reduction in the following cases:
- If the tenant(s) are between 18 and 35 years old. If the owner is renting the property for the first time, the property is located in a stressed area and the tenants are between 18 and 35 years old. The reduction will be applied in proportion to the number of tenants of that age; for example, if there are two tenants and only one is under 35 years of age, it will be applied to half of the rent.
- Social renting. When the dwelling is rented to a public body or non-profit entity under the tax regime of patronage that allocates it to social renting, public housing programmes or similar, a monthly rent lower than that established in the corresponding public programme will be applied.
60 % reduction
If none of the above requirements are met, a 60 % reduction may be applied when the dwelling has been the subject of a renovation project completed within the two years prior to the date of the contract.
- For these purposes, renovation work is considered to be work the main purpose of which is to reconstruct the dwelling by means of the consolidation and treatment of the façade or roof structures and the cost of which exceeds 25 % of the value of the building excluding land.
50 % reduction
Finally, if you also do not meet the requirements to benefit from the above development, the applicable percentage will be only 50 %, i.e. from 2024 for new contracts the general reduction will be 50 % instead of 60 % before 2024.
Limitations on further reductions
Limit 1 : Maintenance of requirements.
However, when calculating these new reductions from 2024 onwards, certain limitations must be taken into account according to the law in order to be able to enjoy the reductions of more than 50%, the requirements must be met at the time of the lease contract, and the incentive will continue to be applicable to the following years if they are still fulfilled.
For example, if the tenant is already 35 years old on 31 December 2025, the 70 % reduction will no longer be applicable for the income tax of that year and the following years.
As mentioned above, the 90 % reduction in the requirement that the new rent is 5 % lower than the previous contract is only applicable to the initial rent.
Thus, even if subsequent rents increase, they should not be considered as non-compliance with this requirement and the incentive would be maintained.
However, if the area in which the property is located is no longer considered to be stressed, the reduction would be lost.
Limit 2: Declared income.
Another requirement that will be applicable from 2021 and that affects all reductions, including the 50% reduction, is that the positive net rental income is effectively included in the IRPF of the corresponding financial year and that it is submitted before a verification (verification of data, limited verification or inspection) is initiated.
Therefore, if you have rented a property during the year, do not forget to include all the rental income in your personal income tax return.
And if you do not declare them within the legal deadline, do so after the deadline with a supplementary return before the tax authorities require you to do so; in this case you will have to pay the appropriate late filing surcharge, but at least you will be entitled to the corresponding reduction of 50, 60, 70, or 90 %.
Limit 3: Stressed areas.
Another limit that will be applicable from 2024 onwards when applying the new reductions is related to the recent rule introduced by the Urban Leases Act (LAU) whereby in the case of dwellings located in stressed market areas, the rent of the new contract cannot exceed the last rent of the habitual residence lease contract that had been in force in the last five years.
As an exception, the rent may be increased by a maximum of 10% over the previous limit without losing the right to the reductions in certain specifically foreseen cases: in the event that renovation work has been carried out in the dwelling or investments have been made to improve energy efficiency or accessibility, or when the duration of the new formalised contract is established for 10 years or more, for example.
In these cases, the provisions of the LAU are not breached in the case of renting in stressed areas and therefore the incentives are maintained.
Temporary aspects
Contracts affected
Although the law on the right to housing which regulates the new reductions determines that they are effective for contracts entered into after their entry into force, which took place on 25 May 2023, it also establishes that these reductions will not be applicable until 2024, as the Treasury has interpreted as follows:
- For rental contracts entered into until 31 December 2023, the current rules and the 60% reduction will continue to apply both in 2023 and in the following years.
- Those entered into after 1 January 2024 will be subject to the reduction regime approved by the new law.
If as an owner you are going to formalise a new rental contract and you think that you will meet the requirements to enjoy the increased reductions of the new law, consider waiting until 2024, however, if you consider that you will not meet them, formalise the contract in 2023 so that you can apply the 60% reduction and not the 50% reduction established by the new law when the increased reductions are not applicable.
In general, the new system of reductions on net rental income from housing implies a decrease in the applicable reduction (from 60% to 50%). However, if certain requirements are met, it increases to 90%.