We share the news published today, Wednesday 23 October 2024, on the front page of the newspaper Expansión, in which Alejandro del Campo Jiménez talks about the different interpretations made by the Spanish Tax Authorities regarding the works carried out by the owners, always seeking a higher taxation of the taxpayer.
The Tax Agency (AEAT) is focusing on works and renovations in properties. Tax experts warn of the difficulties for the owners to be able to deduct repairs carried out on rented properties; as well as to be able to deduct improvements made to transferred properties, all of this in the Personal Income Tax (IRPF), in the case of residents, and in the Non-Resident Income Tax (IRNR), in the case of those residing abroad.
In particular, the lawyers warn of massive proceedings initiated by the tax authorities to challenge taxpayers’ tax returns, interpreting the same articles of the law differently. When it comes to checking what has been declared for rentals from which conservation and maintenance expenses have been deducted, the AEAT states that this deduction is not applicable as the works can be considered as improvements; while when it comes to checking the capital gain obtained from the sale of a property for the calculation of which the amount invested in improvements has been taken into account, the AEAT considers that the works carried out should have been considered as mere repairs and they increase the amount of said capital gain.
This is an issue that the specialists at DMS Legal Intelligence, a firm based in Mallorca, are well aware of. “We are dealing with cases in which a person spends small amounts on a rented property, carrying out masonry, plumbing or electrical work,s” explains lawyer Alejandro del Campo Jiménez. “In their personal income tax return, these expenses are deducted from the rentals obtained, reducing their taxable profit” he points out. However, the firm’s specialists find that the Spanish Tax Authorities challenge these tax returns and consider that the invoices provided by the taxpayer cannot be deducted as a repair or maintenance expense. “The AEAT argues that, taking into account the overall and total cost of the reform, these works consist of an improvement that is not deductible, and that only the amortization or depreciation of this improvement, in principle only 3% per year, could be deducted as an expense”, says Alejandro del Campo Jiménez.
There is another important aspect to these tax obstacles. In many cases, people who buy a property invest large sums of money in renovating and improving it, in some cases spending up to 100% of the price paid for the purchase of the property on improvement works. However, when the time comes to sell the property, the tax authorities come back to challenge their tax returns.
“We have cases in which the owner acquires a property, spends up to a million euros on renovating it and, shortly afterwards, decides to sell it”, explains the lawyer. “In their income tax return, when calculating the possible capital gain on the sale, that person is entitled to deduct the amounts invested in the improvement. Well, the AEAT checks these calculations, stating that the million euros invested in the renovation works deserves to be classified as a repair and not as an improvement, and cannot be taken into account in the calculation of the capital gain. To do so, they carry out an excessively individualized analysis of the different works, invoice by invoice, and without taking into account the work carried out as a whole, unlike what they do when it comes to denying the deductibility of an expense in the case of rentals”, he adds.
The Central Economic Administrative Court (TEAC) has been accepting this questionable criteria for the last few years, according to Alejandro del Campo. However, it has recently issued an important resolution in which “despite not pronouncing clearly and forcefully on when it can be considered that we are dealing with improvement works, it does shed some light on the matter by stating that the investment of high amounts of money and the fact that the same property, a few years later, is sold for a much higher price can be considered as indicia that the work carried out can be considered as improvements”, he concludes. .
At Mares Properties we have all the necessary knowledge and expertise to be able to advise our clients on the best way to carry out all types of works on their properties, whether they are repairs or improvements, and that the amounts invested are taken into account positively when calculating the due taxes.
