Hiding from the Spanish Taxman

According to experts at the Spanish tax ministry (Gestha) around 36.800 properties are being rented in the province of Malaga, and are not declaring it to the taxman!!! According to these same experts this amounts to an income of 65.3 million euros a year. Still further around 73.6% of all rentals in the region of Andalucía or around 184.000 properties escape the taxman.

According to these experts only 1 in 4 landlords declare their rents! And the tenants are in on it as they are the ones that are supposed to withhold the tax and pay it to hacienda!
So why do so many landlords fail to declare their earnings from rentals? Well in this persons opinion it is quite simple. Most people will only pay their taxes when they thinks that the taxes are fair or when they know that they cannot get away with not paying them. Yes I realise this might be a bit cynical, but this does not make it any less true.

At this moment in time if you have a property to rent, after costs (but not including your mortgage) you as a Spanish resident have to pay 15% to hacienda. This strikes many people as a lot of money. But if you are a non-resident this rises to 25% which is just excessive!

Let’s give examples:
We have 2 couples who are both renting their properties at 600€ a month

Mr & Ms Resident                      Mr & Ms Non-Resident
Rent: 600€/month                   Rent: 600€/month
Costs: 150€/month*                Costs: 150€/month*
Gross: 450€                                 Gross: 450€
15%: 67.50€                                25%: 112.50€
Net: 382.50€                               Net: 337.50€

*Please note income-generating expenses are not including in the Costs.

Ok so far? So now lets imagine Mr & Ms Resident have rented their property for 11-months and have earned 4207.50€. With luck the property is returned to them in pristine condition, they return the 1 month deposit and start looking for their next tenant. But what happens if there are damages? Well it will get taken out of the deposit and the remainder will be returned. What happens if there damages are serious? Broken dishwasher or damaged sofa for example? That deposit is not going to go far. So that’s going to eat into the perceived profits. What if the market for the type of property you have is getting more competitive and you want to renovate your property? Say you want to put in a new kitchen or central heating or air conditioning? These costs cannot be deducted! So that 4207.50€ could quite easily disappear by installing a new kitchen.

Now what will happen if the landlords also have a mortgage? Let’s be nice and say 300€ has to be paid to the bank monthly. That 4207.50€ suddenly drops to 907€ after costs. If we take the 15% out of the 4207€ and then the mortgage we are left with 276€ profit. Not a particularly impressive figure is it?

Is it any surprise so many people do not declare rentals? What the government should do is simple. First and foremost treat rental properties for what they are, a business. Allow the owners to offset all their costs that can be shown to be business related. Then reduce the % that needs to be paid to hacienda. With these 2 options there should be an increase in the amount of declared property rentals. After a year implement some sort of certificate that must be obtained prior to renting. With a penalty to the owner and tenant if no documentation can be presented on inspection. Of course for there to be inspections, there needs to be inspectors. In the current job climate it should not be difficult to hire a large contingent of staff to go travelling around asking in agencies and phoning for rent signs. If on demand the paperwork/certificate cannot be presented they get fined. That should clear up the situation quite quickly. Of course the certificates should be easy to obtain with minimal hassle for the landlords.

Andrew Bellés

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3 Responses to “Hiding from the Spanish Taxman”

  1. Andrew

    I understand the 15% are not the final amount, isnt it an advance payment for the IRPF? In that case the costs are actually deductable.

    Now if a tenant does not withold the money, can he get finded as well?


  2. Andrew says:

    Hello Wolfgang,

    first off happy new year to my most faithful reader!

    Impuesto sobre la renta de las personas fisicas (IRPF), is income tax that all residents have to pay. This is not a property tax and depends entirely upon your income and fiscal circumstances. It starts at 15% and goes up as you enter higher income brackets. Your mortgage is deductible from this, but not for the part of your income that is generated from the rental.

    The main point is that a property that is primarily rented is a business. It should be treated as such.

    hope that helps

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