Rental income tax in Spain: how depreciation reduces your IRPF

An investor who lets a property and declares the income under the IRPF (Spanish personal income tax) is entitled to deduct a series of expenses that reduce the taxable base and, therefore, the tax payable. Many investors know the most obvious expenses: the IBI (the local property tax), the owners' association fees, home insurance, mortgage interest. But there is one expense that is systematically forgotten or misapplied—depreciation of the property and its furnishings—and it can cut the tax bill on the rental by several thousand euros a year.

What tax depreciation of a property is

Depreciation is the accounting recognition of the wear and tear and loss of value that a property suffers over time. The law recognises that buildings have a finite useful life and that this depreciation is a real economic cost of letting. That's why it allows the landlord to deduct it as an expense under the IRPF.

For let properties, article 23 of the LIRPF (the Spanish Personal Income Tax Act) states that the maximum deductible expense for depreciation of the property is 3% a year. But there is a critical restriction: that 3% is applied to the depreciation base, which is the higher of the following two values: the acquisition cost or the cadastral value, but excluding the value of the land in both cases. Land isn't depreciated because it doesn't lose value.

Calculating depreciation step by step

1. Get the total cadastral value of the property (it appears on the IBI bill or on the Sede Electrónica del Catastro, the online portal of the Catastro, Spain's property cadastre).
2. Identify the proportion of the cadastral value that corresponds to the building (vs. the land). The IBI bill usually breaks the cadastral value down into land and building. If a flat has a cadastral value of €80,000, with €50,000 for the building and €30,000 for the land, the building proportion is 62.5%.
3. Apply that proportion to the acquisition cost (purchase price plus acquisition costs: ITP, the property transfer tax; notary; registry; gestoría, the agency handling the paperwork). If the flat was bought for €120,000 with costs of €13,000, the total acquisition cost is €133,000. The building proportion (62.5%) of €133,000 is €83,125.
4. Apply the annual 3% to that depreciation base for the building: €83,125 × 3% = €2,493.75 of deductible depreciation a year.

For the investor whose mortgage is at 3.5% a year and who pays €4,200 in interest, plus €800 of IBI, plus €900 of community fees, plus €2,494 of depreciation, total deductible expenses come to €8,394/year before including other costs (insurance, repairs, management). On rent of €9,600/year (€800/month), net income can fall to €1,206 or even to zero if there are more expenses, which can almost entirely wipe out the IRPF payable on the rental.

Depreciation of the furnishings let with the property

If the flat is let furnished (which is common for short- or medium-term lets), the landlord can also depreciate the furnishings let with the property: furniture, appliances, air conditioning, water heater. The depreciation rate for furnishings is 10% a year (vs. 3% for the property), which allows you to deduct the cost of the kitchen, the wardrobes and the appliances in just 10 years. If the renovation included €8,000 of furniture and appliances, the additional annual depreciation is €800.

Depreciation of renovations and improvements

Renovation work carried out on the let property can also be depreciated. The depreciation rate for improvements is also 3% a year (if they are improvements to the structure that become part of the building) or 10% (if they are independent equipment or technical installations such as an air-conditioning unit or a new boiler). If you renovate the kitchen for €10,000 and part of it is building work (€7,000) and part is new appliances (€3,000), the annual depreciation is €7,000×3% + €3,000×10% = €210 + €300 = an additional €510/year.

The cumulative effect: how much depreciation can save

For an investor with a flat bought for €130,000 (total including costs), let at €800/month (€9,600/year), with a depreciation base of 60% for the building:

• Depreciation base: €130,000 × 60% = €78,000
• Annual depreciation: €78,000 × 3% = €2,340/year
• At a marginal IRPF rate of 30% (an investor whose total income falls in that bracket): a tax saving of €2,340 × 30% = €702/year
• Over 20 years of ownership, the cumulative saving from depreciation alone: €702 × 20 = €14,040

Depreciation doesn't avoid the tax for good but defers it: when the property is sold, the depreciation claimed reduces the acquisition price for the purpose of calculating the capital gain (the acquisition price is reduced by the depreciation taken). But deferring tax for years has real economic value.

The annual limit: it's for interest and repairs, not for depreciation

Deducting depreciation can indeed produce negative net income from property. The legal limit applies to other expenses: financing interest and repair and maintenance costs cannot, taken together and for each property, exceed the gross income it generates; anything above that is deducted over the following four years. Depreciation has no such cap: if it takes net income into negative territory, the loss goes into the general taxable base and is offset against the other income in that base, such as your salary.

Related resources: For the scenario of a property-holding SL (a Spanish limited company), where depreciation works differently (under the Plan General Contable, the Spanish general accounting plan) and the deduction can be more aggressive, the article on investing through an SL has the tax analysis. For calculating net cash flow after tax (where depreciation plays a central role by reducing the base), the guide to cash flow in property investment has the full method. For deductible rental expenses in the context of bank repossessions and renovated assets, the guide to bank repossessions covers the applicable tax rules.