Tax Authority Clarifies Which Works on Rented Properties Are Deductible and Which Are Not

The General Directorate of Taxes (DGT) has published a binding consultation that clears up doubts about the tax treatment of renovations in rented properties. The key is whether the work maintains or improves the property.

The General Directorate of Taxes (DGT) has issued binding consultation V1279-26, which clarifies the criteria for differentiating between repair costs and improvements in rented properties. This distinction is crucial for landlords, as it determines whether the work is deductible for income tax or not.

Repairs: What the Tax Authority Allows to Deduct

According to Article 13 of the Income Tax Regulation, repair and maintenance costs necessary to keep the property in normal use conditions are deductible. This includes painting walls, repairing installations, or replacing worn elements with equivalent ones, such as a broken boiler or an existing lift.

These expenses have a limit: they cannot exceed the income obtained from the rental in that fiscal year. If the amount, along with interest and other financing costs, exceeds these earnings, the excess can be deducted in the following four years.

The DGT emphasizes that the replacement of one element with another equivalent is not considered an improvement, but a repair, as long as it does not increase the property's performance.

Improvements: When They Are Not Deductible and What Effects They Have

Works that increase the capacity, habitability, efficiency, or useful life of the property are considered improvements or extensions, not deductible expenses. The DGT relies on the ICAC Resolution of 2013 to define an improvement as an alteration that increases the productive efficiency of the asset.

These actions, such as installing a more efficient air conditioning system or expanding a room, cannot be deducted as an expense, but they increase the depreciable base and the acquisition value of the property. This will affect the calculation of the capital gain when the property is sold.

Therefore, an improvement has a deferred tax effect: it does not reduce the income of the fiscal year, but it does reduce the potential future tax on capital gains.

How to Avoid Problems with the Declaration of the Work

The binding consultation warns that the classification of a work does not depend on how it is named on the invoice, but on its real nature. Therefore, it is essential to keep documentation that proves whether it is a repair or an improvement.

When a single project combines both types of work, it is advisable to request separate invoices for each concept. The fees of architects or technicians will follow the same tax treatment as the work to which they are linked.

For the landlord, differentiating from the outset avoids surprises in a possible tax inspection and allows for optimising the income tax declaration. In case of doubt, it is advisable to consult a tax advisor before deducting any expense.