At Living Sitges, we understand that one of the most complex and important topics for homeowners is taxation under the IRPF (Spanish personal income tax). Understanding how taxes apply to different real estate situations is essential to avoid surprises when filing your tax return. Below is a comprehensive guide on how to tax your property under the IRPF, depending on its use.
Taxation of the Primary Residence
The primary residence is exempt from taxation under the IRPF, meaning you won’t have to pay taxes on it, although you must include it in your tax return.
Taxation of a Second Home
If you own a second home, its taxation varies depending on whether it generated income or not:
- No rental income: If you did not rent out the property during the tax year, you must pay taxes under the general IRPF base for the imputed rental income. This means you will pay taxes on a percentage of the property’s cadastral value, which could be 1.1% or 2%, depending on the case.
- With rental income: The income earned is considered capital income from real estate, and you may deduct related expenses.
Taxation of a Rented Property
If you rent out a property, you must declare the income earned as capital income from real estate. To calculate this, you need to account for both the income received and deductible expenses, which include, among others, financing interest, repair costs, and local taxes.
Taxation of a Rented Second Home
Until 2023, the income from a rented second home used as a primary residence enjoyed a 60% reduction. However, starting in 2024, this reduction has been lowered to 50%. Additionally, this tax benefit does not apply to short-term or tourist rentals.
Taxation of an Inherited Property
Inheriting a property does not require taxation under the IRPF, unless the property is sold, which would generate a capital gain subject to taxation. If the inherited property is rented out, the income earned is taxed as capital income from real estate.
Transfer of Property to Relatives
Transferring a property to relatives can trigger the obligation to pay taxes under the IRPF. Depending on the contract and the degree of kinship, taxes may be due on either imputed income or capital income from real estate.
Taxation of a Vacation Home
Income from short-term or tourist rentals is taxed as capital income from real estate. However, if you employ someone to manage the property, the income may be classified as income from economic activities. You need to declare the rental income and deduct expenses proportionate to the days rented.
Purchasing a Property
Buying a property does not create a tax obligation under the IRPF, but you must include the property in your tax return. When purchasing a new property, you will need to pay VAT (generally 10%) and the Stamp Duty (AJD). For second-hand properties, the main tax is the Property Transfer Tax (ITP), which varies by region.
Reinvestment in Primary Residence
If you decide to sell your primary residence to buy another, the capital gain from the sale may be exempt from taxation if you reinvest the proceeds in a new property within two years.
Taxation of Property Surrendered in Lieu of Payment
If you surrender your primary residence in lieu of payment or through a foreclosure process, the capital gain may be exempt from taxation under the IRPF, provided certain conditions are met, such as the full cancellation of the mortgage debt.
At Living Sitges, we help you understand and manage all these aspects so you can make informed decisions about your property. Contact us for more information!
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