Concept of real estate capital returns

Regulations: Art. 22.1 Law Income Tax

The following are considered to be gross income from real estate capital: those derived from the leasing or from the constitution or transfer of rights or powers of use or enjoyment over rural and urban real estate or from real rights that fall on them , whose ownership corresponds to the taxpayer and are not affected by economic activities carried out by the same.

The real rights of use or enjoyment over the property include, among others, usufruct, the right of use and habitation, the real right of time-share use of real estate, the right of surface, easements, censuses and emphyteutic census.

Full or shared ownership of property rights or real rights of enjoyment over real estate that is not leased or transferred to third parties, nor is it used for economic activities, does not generate real estate capital gains, but rather gives rise to the application of the special regime for the imputation of real estate income, with the exception of habitual residences, undeveloped plots of land and rural properties.

See in this regard, within Chapter 10, the section " Real Estate Income Imputation Regime ", and articles 6.2.e) and 85 of the Personal Income Tax Law and, exclusively for the 2023 tax period, the provisions of the Fifty-fifth Additional Provision of the Personal Income Tax Law .

Further clarifications regarding the concept of real estate capital gains

1. Leasing of real estate as a return on real estate capital

Regulations: Art. 27.2 Law Income Tax

The income derived from the leasing of real estate is considered as income from real estate capital, unless the leasing is carried out as an economic activity.

For these purposes, it is understood that the leasing of real estate is carried out as an economic activity only when at least one person employed with a full-time employment contract is used to organise it.

In order for the income derived from leasing to be classified as income from real estate capital, the rental must be limited to the mere provision of a property for periods of time, without being accompanied by the provision of services typical of the hotel industry, such as: periodic cleaning services, linen changes, catering, leisure or other similar services. If it is accompanied by this type of complementary services we are dealing with a business activity and the income derived from it will be considered as income from economic activities, in accordance with the provisions of article 27.1 of the Income Tax Law.

Consequently, if services typical of the hotel industry are provided by the lessor, we are dealing with income derived from economic activities and if such services are not provided are dealing with income from real estate capital, unless the circumstances provided for in article 27.2 of the Income Tax Law occur (that is, a person with an employment contract and full-time workday is available to carry out the activity), in which case, the income derived from the lease will also be considered income from economic activities.

2. Sublease

Regulations: Art. 25.4.c) Law Income Tax

In the case of subleases, the amounts received by the sublessor are considered income from movable capital .

However, the participation of the owner or usufructuary of the property in the sublease price is considered as real estate capital gains , without it being necessary to apply the reduction for leasing of real estate used as housing to the net income, established in article 23.2 of the Personal Income Tax Law , which is discussed later.

3. Leasing of businesses or mines

Regulations: Art. 25.4.c) Law Income Tax

Amounts received from business or mine leases are considered tax-related as returns on movable capital .

However, if the lease is only for a business premises , the returns obtained must be classified as from real estate capital and quantified by applying the rules discussed in this Chapter.

A distinction must be made between the leasing of business premises and the leasing of a business: If the object of the lease contract is not only movable and immovable property, but also an economic unit with its own entity capable of being immediately exploited, or pending mere administrative formalities to be so, the income received will be computed among those from movable capital; If the object of the lease is only the business premises, the income will be considered to come from real estate capital.

4. Compensation for early termination of the lease agreement

The compensation paid as a result of the early termination of the lease agreement is considered by the owner-lessor as an improvement and not as a deductible expense for determining the net return on real estate capital. For the tenant who receives it, it constitutes a capital gain whose generation period will be the one corresponding to the length of the lease contract.

5. Property with simultaneous use or purpose in the same period (leased and at the disposal of its owners)

When a property is subject to different successive or simultaneous uses in the same tax period, that is, rented for part of the year and at the disposal of its owner for the rest, the income derived from the rent constitutes income from real estate capital and the income corresponding to the non-rented period or the non-rented part is considered imputed income from the ownership of the property, provided that it does not become the taxpayer's habitual residence.

The imputation of income from properties that have been, during the year, totally or partially, at the disposal of their owners or usufructuaries is discussed in Chapter 10.

The amount of the yields and imputed income will be determined in proportion to the number of days that the properties have been rented or unrented, respectively, during the fiscal year.

Income from real estate that is not leased or subleased, but is intended to be so (property in expectation of being leased), is taxed as imputed income and expenses corresponding to that period cannot be deducted, as long as no real estate capital gains are obtained during that period. Interpretive criteria established by the Supreme Court in its Judgment No. 270/2021, of February 25 ( ROJ : STS 910/2021).

6. The leasing of common elements of a building

The leasing of common elements of a building, such as part of the façade or the roof, by the community of owners gives rise to returns on real estate capital that will be attributed to the co-owners according to their participation in the community.

The regime for attributing income obtained by certain entities, including property owners' associations, is discussed in Chapter 10.