Property owners and real estate investors increasingly wonder whether it is more efficient to rent out their homes personally or through a company. We analyse taxation, deductible expenses, VAT and formal obligations.
It is increasingly common for property owners and real estate investors to wonder whether it is more efficient to rent out their homes personally or to set up a company to manage their real estate assets.
The answer is not simple. In many cases, creating a company can generate tax advantages, but in others it means higher costs, more formal obligations and even higher taxation.
For this reason, before incorporating a company, it is advisable to carry out an individualised analysis of each case.
What are the differences between renting a home as an individual or through a company?
The main difference does not lie in the possibility of renting out the property, since both options are perfectly valid.
The differences appear mainly in four aspects:
- The taxation of the income.
- Tax-deductible expenses.
- VAT treatment.
- Tax and accounting obligations.
Choosing the right structure can mean significant tax savings in the medium and long term.
Renting out a home as an individual
When an individual rents out a home, the income is generally taxed under Spanish personal income tax (IRPF) as income from real estate capital, unless the requirements to consider it a business activity are met.
For the rental to qualify as a business activity, the regulations generally require having at least one full-time employee dedicated to managing the activity.
In the case of most small owners, this is not usually the case.
What expenses can an owner deduct?
One of the main benefits of renting out as an individual is the possibility of deducting numerous expenses related to the property.
Among others:
- Mortgage loan interest.
- Maintenance and repair expenses.
- Insurance.
- Real estate tax (IBI) and other taxes.
- Community fees.
- Professional fees.
- Legal expenses.
- Depreciation of the property.
However, the deductibility of certain expenses may be limited during periods in which the property is vacant or not actually leased.
The IRPF reduction can make the difference
One of the main tax incentives for owners is the reduction provided for leases intended as a habitual residence.
However, when the tenant is a company, many people mistakenly believe that this reduction automatically disappears.
Case law and administrative doctrine have confirmed that the reduction may be maintained where it is proven that the property is effectively intended as the habitual residence of a clearly identified individual.
On the contrary, if such effective use cannot be proven, the Spanish tax authorities may deny the application of the reduction.
Renting out a home through a company
Another alternative is for the property to belong to a company and for the company to enter into the lease agreements.
In this case, the profits obtained are taxed under Spanish corporate income tax.
This option is usually considered when the owner has a significant real estate portfolio or plans to make further investments.
Does a company offer tax advantages?
It depends on the case. Where the company meets certain requirements, it may benefit from the special regime for entities engaged in the rental of housing.
This regime provides for a 40% rebate on the part of the gross tax quota corresponding to certain income from residential rentals.
However, access to this regime requires meeting important conditions, including:
- Having at least eight dwellings intended for rental.
- Keeping them leased or offered for rental for a minimum of three years.
- Keeping separate accounting for each property.
Failure to comply with these requirements may force the tax benefits obtained to be regularised.
What about VAT?
The rental of dwellings exclusively intended as a habitual residence continues to be, as a general rule, exempt from VAT.
This exemption may be maintained even where the tenant is a company, provided that it is proven that the dwelling will be occupied by a specific individual and there is no assignment or subletting.
However, if the property is partially used as a professional office, tourist accommodation or for other purposes other than housing, the tax treatment may change completely.
So, which is the best option?
There is no single answer.
As a general rule:
Renting out as an individual is usually more efficient when:
- You own one or a few dwellings.
- You intend to apply the IRPF reduction.
- There is no real estate activity of a certain size.
A company is usually interesting when:
- There is a significant real estate portfolio.
- Profits are regularly reinvested.
- You intend to professionalise real estate management.
- The requirements of the special corporate income tax regime are met.
Each situation must be analysed individually, since an adequate structure can mean significant tax savings, while an incorrect decision can significantly increase taxation.
Recommendations before deciding
Before transferring a property to a company or starting to rent through a company, it is advisable to analyse in advance:
- Current IRPF taxation.
- The tax cost of contributing or selling the property to the company.
- The possibility of applying the reduction for residential rentals.
- VAT treatment.
- Actually deductible expenses.
- The expected return on the investment.
- The accounting and commercial obligations the company will assume.
In many cases, incorporating a company solely for tax reasons is not the most efficient option.
How can TAXAKALE help?
At TAXAKALE we advise owners, investors and companies on the tax planning of real estate investments.
We analyse every transaction before it is executed to determine the most tax-efficient structure, avoiding unnecessary costs and future disputes with the Spanish tax authorities.
If you are thinking of renting out a home, setting up a patrimonial company or reorganising your real estate portfolio, our team can help you make the most appropriate decision before making the investment.