Rent-to-own between individuals
Patrick Gordinne Perez2024-12-24T11:32:34+00:00If you are a private individual and you have difficulty selling your home, offer it for rent to buy.
In this way, as well as facilitating its transfer, you will pay less income tax on the capital gain obtained.
Taxation of the seller
Housing
If you are a private individual and have had a property for sale for some time, a good option is to propose to your potential buyers to formalise a rental with purchase option.
For example, by agreeing that, four years after the start of the rental period, the tenant will be able to purchase the property at a previously agreed price (with the rental instalments being payments on account of the final sale price).
Reduced rent
If you act in this way, you will benefit: the income you receive from renting will constitute income from real estate capital.
And if the property is going to be used as a permanent home for your tenants, you will be able to apply a reduction in your personal income tax of between 50 and 90% of the net rental income.
Remember that from 2024 the reduction for rental housing applicable to new housing leases that are formalised (this includes those formalised from 26 May 2023) has been reduced from 60% to 50%.
However, in some cases this reduction can be increased to 60, 70 or 90% (for rentals in stressed areas or if the property has been rehabilitated).
Sale
Once the rental contract has ended, if the tenant keeps the property, you will obtain a capital gain from the sale. Well, when calculating your personal income tax:
- Although the rents paid are considered as payments on account of the price of the property, you will not have to rectify the IRPF declarations already submitted.
- However, these payments will reduce the sale price of the property, as well as the capital gain obtained.
And this is to your advantage: as you will have benefited from a reduction of between 50 and 90% on the net yield from rentals, the saving in personal income tax that you will obtain on transferring the property will be greater than the tax cost of renting it out before selling it.
Example of renting with option to buy
In 2028, you sell for 300,000 euros a property that has been rented with an option to buy since 2024 (for four years).
The rents received (and which constitute payments on account of the price) have amounted to 43,200 euros (900 euros per month), and you have not received any amount for the purchase option.
If the purchase value of the property is 170,000 euros, see what your taxation will be and compare it with what you would have paid if you had not rented it:
Concept | Without rent | With rent (50% reduction) |
Rental yield | 0 | 28.200 (1) |
IRPF rent (45%) | 0 | 6.345 (2) |
Gain on sale (3) | 130.000 | 86.800 |
Cost of personal income tax (19%-28%) | 28.780 | 18.844 |
Total taxation | 28.780 | 25.189 |
During the four years, total expenses of 15,000 euros (interest, property tax, depreciation) are deducted from the rental income: 43,200 – 15,000.
It is assumed that the applicable rent reduction is 50% and that the marginal rate is 45%.
300,000 – 170,000 if there is no rent and 300,000 – 170,000 – 43,200 if there is rent.
Lease term
When agreeing the term of the lease with option to buy:
- Since tenants now have the right to remain in the flat for at least five years, agree that the tenant will have the right to buy the property for a term shorter than this legal minimum (e.g. during the first four years).
- Thus, if the tenant does not exercise the option at the end of the fourth year, you will have enough time to notify the tenant that you are not extending the lease and you can take back the property to rent it again with an option to buy or sell it.
Property Taxation of the call option
Price for the option
When formalising the purchase option, it is common to agree with the tenant on a price for the option (a premium), which is also considered to be on account of the final price (in this way, the tenant has an additional motivation to exercise the option, since if he does not do so, he will lose the money).
Well, if he agrees on such a price:
- In the year in which you formalise the purchase option , you will have to declare a capital gain for the amount received (taxed at a rate of between 19 and 28%) in the savings base of your personal income tax.
- When transferring the property, this amount can be deducted from the sale price, as is the case with rents received.
To calculate the gain to be declared for the purchase option, the seller can deduct from the premium received the expenses derived from the constitution of the option itself (amounts paid to the real estate agent, the notary…).
REMENBER
Very important
Taxation of the buyer
Subsequent sale of the property
Increased acquisition value
For the purchaser of the property, the payments made for the purchase option and for the part of the rents that are on account of the purchase price represent a higher acquisition value.
Thanks to this, if in the future you decide to transfer the property, you will be able to declare a lower gain in the IRPF for the sale (calculated by the difference between the sale value and the acquisition value).
Main residence
On the other hand, remember that, if the property transferred constitutes the main residence of the transferor, the capital gain may be exempt provided that the amount obtained is reinvested in the purchase of a new main residence within a maximum period of two years.
For these purposes, the building that has been the taxpayer’s residence for a continuous period of at least three years is considered to be the main residence.
Renting with a prior option
According to this, it seems that the concept of habitual residence is linked to that of “residence” and not to that of “ownership”.
However, if the transferor has acquired the property through a lease with an option to buy, he will have occupied the property for some years as a tenant and for others, after exercising the option, as an owner.
What happens if at the time of selling the property his total period of residence is more than three years but is less if only the period during which he was the owner is taken into account?
Reinvestment exemption
Tax authorities’ criteria
According to the tax authorities, in this case it is not possible to apply the reinvestment exemption.
The tax authorities refer to a Supreme Court ruling which confirms that, in order to apply this incentive, the property must have been owned by the transferor for the three years prior to the transfer.
Prudence
If you find yourself in such a situation, a prudent option is to wait to sell the property three years after exercising the purchase option.
And if this is not possible, declare the gain, rectify the tax return by applying the exemption and apply for a refund of undue income.
Debatable
There are arguments to defend that in this case it is possible to apply the reinvestment exemption and obtain a refund:
- The ruling wielded by the Treasury analyses an IRPF regulation that is no longer in force and in which the concept of habitual residence was articulated in the context of the “deduction for the acquisition of a home” (now repealed).
- Neither the current regulation nor its transitional provisions on the now repealed deduction mention that the home must be owned for three years. The “interpretative connections” between the two concepts have been diluted: according to the wording of the current law, the three-year period is only linked to residence and not to ownership.
It is true that an additional provision of the current law (the 23rd) mentions the three-year period and refers to the date of acquisition.
But this is done to resolve a very specific case (when the date of acquisition does not coincide with the date of occupation) and, moreover, for the benefit of the taxpayer.
In resume
If you rent the property with the option to buy, the rents will enjoy a reduction in the IRPF and, when you sell it, you will be able to declare a lower profit thanks to deducting the amount of the rents received, thus reducing the total amount to be paid for IRPF.