Gecko Towers:
For some owners of a property in the Marbella region, be they long-term owners or recent buyers, there are often several drivers that prompt them to chose to invest in this market.
Investor purchasers are drawn by different concerns to lifestyle purchasers. For instance, there is a practice that we used to refer to in the UK as “flipping”. Buying an older property in need of cosmetic overhaul, as opposed to major redevelopment. Updating kitchens, bathrooms and adding amenities such as updated aircon or an outdoor pizza oven together with extensive redecoration. The net effect, when such a property is bought economically, is to substantially increase the investor’s gain via the achieved sales price. A profit of circa 25% to 35% – pre-Capital Gains Tax – is the aim, and often seems to be achieved.
The lifestyle purchaser buys for altogether different reasons. For many it’s a reward for a lifetime of hard work. A golf course, mountain or beach side view ticks many boxes. For others it simply “My Place in the Sun”.
However, for many, the reality of the costs of both acquisition and annual upkeep require, increasingly, the head to firmly rule the heart. There has never been more interest in seeking to sweat a foreign property asset to ensure that it delivers some meaningful funds back into the owners coffers to assist in the costs of its upkeep. There are several reasons for this, not least annual maintained costs, such as Community Fees – Are you ready to join a Community of Owners? – and local property taxes such as IBI (local rates) and “Basura” (local refuse collection tax).
In a previous era the ability to place your property for short term rental on an international website portal that would advertise its availability, handle bookings and process payments became a normal practice for some owners. Alternatively, a rental agency would arrange for short term renters to be met, either at the property or the airport, given keys, a welcome pack of shopping and linen and wished a happy holiday. The proceeds from the rental would be paid to the owner less the sum of the rental agents commission and expenses. All apparently simple and attractive to the various parties.
A number of years ago the local tax office – colloquially called “the Hacienda“ – cottoned onto the regular practice of an owner renting his/her property at various times during the year and invariably sums being paid from holiday tenants which were undeclared to the authorities by way of Income Tax. Indeed, they may never have touched Spain given the ease of international banking.
It is important that I make clear that here we are talking about short term vacation rentals of the property not longer term tenancies. The rules vary and in fact, in my opinion, the nature of long term tenancies in the Andalusian market are fraught with difficulties and specific advice should be sought if you are considering granting a long-term tenancy of your property.
While I am told that there has been an obligation for some years for Residents and Non-Residents alike to submit an annual tax returns, on their second home, whether or not the property is rented, the position seems to differ not only on the Owner’s country of residence but also the use made of the property:
My professional colleagues have told me:
A. When the property is actually rented:
- Income tax is payable on the actual rental payments received. The tax rate applicable in 2021 for residents in the EU/EEA was 19% and 24% for non EU/EEA (European Economic Area) – which includes those from UK.
- It should be noted that EU residents (as opposed to Non-EU) are, I am advised, entitled to offset certain costs against the rental income to calculate the net taxable income. These costs include local rates (I.B.I.), Community Fees, mortgage interest payments, insurances, the costs of repair to the property, in other words, generally the costs that are not the obligation of the tenant but are assumed by the owner. Although the costs for depreciation of the property can also be included, I am told, this is likely to have a detrimental effect in a later calculation of a Capital Gain from a future disposal by sale of the property.
- Rental income for tax purposes is accrued on quarterly basis so income tax returns have to be submitted every quarter on the, where permitted, net profit (actual rents received less costs); and
B. Imputed income, where the property is not rented to third parties and remains for the private use of the Owners(s):
- Tax is due on a general basis, being 2% of the Cadastral Value of the property (which values are periodically reviewed to stay in line with property prices) which appears on the Local Rates Tax “IBI” receipt.
- In case of a property whose Cadastral Value has been reviewed in the last 10 years, the rate is set at 1,1%.
- In the case of a property without a Cadastral Value or if said value has not been notified to the Owner, the percentage is 1,1 % based on a calculation computed by reference to 50 % of the purchase price of the relevant property.
- The Tax rate payable for 2021, for non EU/EEA residents: 24% and for EU/EEA residents: 19%.
What happens when your Spanish property is your main or sole property?
My Spanish legal and accounting colleagues have pointed out that in Spain your main home is exempt from such Imputed Income Tax – as opposed to the obligation to pay Income Tax on rental income received. Indeed, this is the only situation when you will not pay Income Tax on your Spanish property. The “main home” is a concept linked to tax residency, which means in order to benefit from an Income Tax exemption on your Spanish property you will need to satisfy two criteria:
(i) That you are a tax resident in Spain and (ii) The Spanish property must be your “main home”.
In more recent years the ‘staycation’ model has posed a direct threat to the more established hotel trade and was seen as unfair competition from unregulated “private” tourism rentals. As a result, the legislation was changed in 2016 to require those who wished to make their property available for rental needed to obtain a registration – “a Tourism Licence” – with the Andalusian Council of Tourism. It is understood that this is processed on a Municipality by Municipality basis. This has allowed the authorities to have more control over unregulated rentals but also to flush out those who failed to declare their income from rental activity.
It has been suggested – and this require further investigation – that for those keen to gather together a portfolio of rental properties into a solid business unit, that there seem to be locally imposed limits to the number of Tourism Licences that any one owner can hold.
Seeking registration seems to be not a particularly arduous task but it does require some effort and, like many administrative things in Spain, it is best handled by your Abogado. A failure to obtain such a registration will prevent you from legitimately seeking holiday lets and contributing to your overall “business plan” for the management of your Costa property.
A word to the wise. If you are buying your property with a pre-determined investment model in mind to assist with its upkeep it may be worth raising your commercial ambitions with your trusted Abogado. As you’ll need to consider the way in which you make your purchase. The combinations are varied and, particularly, if your aim to make use mortgage funding, this may become more complicated but I have heard it argued that if extensive rental is your ambition it may be a solution to purchase your property via an owning Spanish company – usually referred to as a “Spanish SL”. The tax advantages of you making your purchase in this way could be attractive and specialist advice should be sought.
One note of caution, I was recently studying a Spanish bank’s mortgage deed and it contained a reference to the person taking the mortgage being obliged to not to be away from the property for a period exceeding 28 days at any one time. If you have a mortgage and are considering several short term rentals, during, say the summer months, please make sure you are not in breach of your lending conditions.
Additionally, you my also consider discussing your buildings and contents insurance with your local insurance broker if it’s clear that you may not be occupying the property for a number of months – there’s often a limit by virtue of the policy’s terms. The cover needs to extend to those contingencies insured against, such as fire or flood damage, when the property is not occupied by you.
Given the seasonality to this activity, whilst a golf view property may have the prospect of being an attractive rental throughout the nine months or so from September each year, a beach side property may only have a limited three to six month opportunity for such rentals. However, the likely rents that a decent property can command will vary throughout the year but substantial sums could be involved.
Another note of caution, which is perhaps best checked and reported upon by your professional advisors prior to purchase. If your “Business Plan” for your property, that is based in a Community of Owners, is to make substantial short term rentals. It is important to identify, whether the Community “allows” holiday rentals and/or whether it imposes an addition (often a “penalty percentage”) quota on top of your usual Community Fees to compensate the community for any additional work that needs to be undertaken as a result of the use of Community facilities by your rental tenants. The impact of such measures make seriously affect the legitimate commerciality of your use.
The best practice advice must be to carefully plan to ensure that your property is properly covered under the regulations for tourist rental and to make the required quarterly/annual returns.
Should you be interested in discussing the legal process involved in buying a property in the Marbella region, we would be delighted to assist you. Our multi-disciplinary team of bi-lingual, highly experienced and wholly independent Abogados and Asesores Fiscales are ready to help you.
Please call me, Mark FR Wilkins, during usual business hours on +34 600 343 917 or, if you prefer, or e-mail me at mark@roslegal.es
Please note that our posts are for general interest. There is no substitute for proper legal advice tailored to your specific circumstances as provided by a qualified Abogado who is experienced in the application of the Spanish Law.
Nothing contained in this article should be seen or taken as the writer or the publisher providing legal or financial advice.
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