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Practical manual for Income Tax 2023.

Amounts intended for amortization

Regulations: Articles 23.1 b) Law IRPF and 13 h) and 14 Regulation IRPF

Amounts used for the amortization of the property and other assets transferred with it are considered deductible expenses, provided that they correspond to its effective depreciation.

Amortization is the way of taking into account the depreciation suffered by properties that generate income due to use or the passage of time.

As for the method of calculation to consider that amortization responds to effective depreciation, we must distinguish:

• Property

In the case of real estate, depreciation will be considered to meet the effectiveness requirement when, in each year, it does not exceed the result of applying the percentage of 3 percent on the highest of the following values:

  1. Acquisition cost satisfied, which will be:

    • In the case of properties acquired for consideration: the acquisition price, including the expenses and taxes inherent to the acquisition (notary, registration, non-deductible VAT , Tax on Property Transfers and Documented Legal Acts, agency expenses, etc.) without include in the calculation the value of the land, as well as the cost of the investments and improvements made to the acquired assets.

    • In the case of acquired free of by inheritance or donation: the value of the property acquired in application of the rules of the Inheritance or Gift Tax or its value verified in these taxes (excluding the value of the land from the calculation), plus the expenses and taxes inherent to the acquisition that correspond to the construction and, where applicable, all the investments and improvements made to the acquired property.

      Interpretive criteria established by the Supreme Court (Administrative Litigation Chamber) in its Judgment No. 1130/2021, of September 15 ( ROJ : STS 3483/2021).

  2. Cadastral value, excluding the value of the land.

    When the value of the land is not known, it will be calculated by prorating the acquisition cost paid between the cadastral values of the land and the construction of each year reflected in the corresponding receipt for the Real Estate Tax (IBI).

Limit on accumulated depreciation of real estate

The limit of accumulated amortization will be the acquisition value of the property generating the income. Therefore:

  • In the case of assets acquired for valuable consideration , the accumulated depreciation may not exceed their acquisition value in accordance with article 35 of the Personal Income Tax Law (excluding the value of the land from the calculation).

    According to the aforementioned article 35 of the Personal Income Tax Law the acquisition value will be formed by the sum of:

    1. The actual amount for which the acquisition would have been made.

    2. The cost of investments and improvements made to the acquired assets and the expenses and taxes inherent to the acquisition, excluding interest, which have been paid by the purchaser.

  • In the case of properties acquired for profit , the limit of accumulated depreciation, in global computation, may not exceed the acquisition value in accordance with article 36 of the Personal Income Tax Law (excluding the value of the land from the calculation).

    According to article 36 of the Personal Income Tax Law, in these cases the actual value of the respective values will be taken as those resulting from the application of the rules of the Inheritance and Gift Tax, without being able to exceed the market value.

Example:

Mr. RRR acquired by inheritance a property whose value attributed in the settlement of the Inheritance and Gift Tax (ISD) and which appears in the public deed of inheritance award was 100,000 euros.

The costs and taxes inherent to the acquisition (notary, registration, ISD) amount to 2,000 euros.

The cadastral value of the inherited property: 80,000 euros.

The percentage that the value of the land represents in relation to the total value of the property is 20%.

Once inherited, the property was leased to third parties.

Calculate the depreciation corresponding to a property that is rented and the deductible accumulated depreciation limit.

Solution:

1. Calculation of amortization.

The highest of the following values will be taken for the calculation of amortization:

  • Acquisition cost satisfied: 80% s/(100,000 + 2,000) = 81,600
  • Cadastral value excluding land value: (80% of 80,000) = 64,000

The amount of depreciation deductible as an expense to determine the return on real estate capital may not exceed the result of applying the percentage of 3% to the highest of the above values. In this case, it will be the acquisition cost paid, which includes the value attributed in the settlement of the Inheritance and Gift Tax plus the expenses and taxes inherent to the acquisition (excluding the value of the land from the calculation).

Therefore, in this case the amount of the maximum deductible annual amortization will be 3% of 81,600 euros = 2,448 euros

2. Accumulated amortization limit.

The taxpayer may depreciate the property until the accumulated depreciation amount reaches the acquisition value of the property which, in accordance with the provisions of article 36 of the Personal Income Tax Law, is the value of the property for the purposes of ISD (excluding the value of the land from the calculation) plus taxes and expenses inherent to the transfer, that is, 80% x (100,000 + 2,000) = 81,600 euros.

Remember: In the event that the property has not been rented for the entire year, the deductible amortization, interest and other financing costs, expenses on insurance premiums, community fees, property tax, supplies, etc., will be those corresponding to the number of days of the year in which the property has been rented.

In periods in which the property has not been rented, the amount resulting from applying 2% or 1.1%, as appropriate, to the cadastral value of the property, which proportionally corresponds to the number of days included in said period, in accordance with the provisions of article 85 of the Income Tax Law, must be .

• Movable assets transferred together with the property

They will be amortizable provided that they can be used for a period of time greater than one year.

The annual deductible amortization for each of the transferred assets shall be deemed to meet the effectiveness requirement when its amount does not exceed the result of applying to its respective acquisition costs the amortization coefficients that correspond to it in accordance with the simplified amortization table approved by Order of March 27, 1998.

This table includes, among others, the following maximum depreciation coefficient, which for Installations, furniture and fixtures is 10 percent.

• Rights or powers of use or enjoyment over real estate

They will be amortizable provided that their acquisition has entailed a cost for the taxpayer. In these cases it is necessary to distinguish:

  1. If the right or faculty has a fixed term, the deductible annual amortization will be the result of dividing the acquisition cost paid by the number of years of duration of the same.

  2. If the right or faculty is for life, the computable amortization will be the result of applying the coefficient of 3% on the acquisition cost paid.

In both cases, the amount of deductible amortization in the financial year may not exceed the amount of gross income derived from each right.

Example:

Mr. AST acquired through a sale the right of usufruct over a property for a period of 10 years, paying the sum of 100,000 euros for it. During 2023, said property has been rented, receiving an annual rent of 20,000 euros.

Calculate the depreciation corresponding to a property that is rented.

Solution:

Amortization

  • Acquisition cost / duration of usufruct (100,000 ÷ 10 years) = 10,000
  • Limit on gross income of the right: Annual rental income = 20,000

Full ownership and usufruct of a property:In cases where a taxpayer owns 50% of the full ownership of a property intended for leasing and has usufruct over the remaining 50%, the amortization expense will be calculated differently for the part of the property of which he is the full owner and the part of which he is the usufructuary, taking into account the rules that were indicated previously for each of them.