RENTAL INCOMES

Income from rental properties is also known as returns on real property. These returns are attributed to the property owner, i.e. the person whose name is in the titled deed. In the event that the title of this property is in the name of 2 persons (e.g. husband and wife), revenue and expenditures are attributed in equal parts. Now, then, if a person owned the property before marriage, the rental income shall be attributed to such person.

In order to review the returns obtained from rental properties we should first examine the revenue and expenditures related to such returns (deductible necessary expenses to manage, conserve and maintain your rented property). In addition to the expenses, the depreciation of the property may also be deducted in a 3% of its value. This percentage shall be applied to the building not to the land. Therefore, if in a titled deed the total value of the property includes the land value, the latter should be discounted, as land is not depreciated. In order to known the proportion of land area to gross building area, you can check your local rates receipt (IBI receipt). This receipt shows your property cadastral value and it also contains the building and land values.

In the event that the rented property is furnished, the deductible percentage for furniture, decoration, kitchenware, etc. is 10%. However, furniture bills are usually lost and in that case the depreciation percentage for furniture would not be discounted as you would not have any proof of the price you paid for them and, in case of inspection, these expenses would be rejected.

Costs of repair and maintenance to keep your property in good conditions are also deductible, including the substitution of certain elements such as lifts, electrical and heating installations, doors, etc, but not the improvements such as the installation of a lift in a property which did not previously have one. In the event that your tenant has failed to pay any rent you could deduce the due rent if 6 months have passed since the first collection attempt. When the rented property is to be used as a permanent accommodation (not a seasonal rental or an apartment rented to a company for accommodating its employees) the estimated net income shall be reduced by 50%. When the property is rented to the spouse or a relative, the estimated income shall not be less than 2% of the cadastral value or 1.1% of such value if the cadastral values have been revised since the 1^st January 1994.

In the event of not rented urban properties, other than principal residences, an income estimation of 2 percent shall be applied (1.1 % if the values have been revised since the 1^st January 1994.)

NOW IS MORE DIFFICULT TO EVADE RENTAL INCOMES

Since two years ago, taxpayers have to provide, on their tax return forms, the cadastral reference number of the property in which they live, whether as owners or tenants, in order to detect those properties rented but not declared and to enable the contrast of information between landlords and tenants. In addition, from the last 1st of January, the power companies are obliged to include the cadastral reference number in all their power supply contracts; this obligation is applicable to all contracts, both those signed from such date and those that already existed.

The General Directorate for the Cadastre is developing a software tool that makes possible to automatically assign the cadastral reference number to the properties, even for those whose construction has not even started. But, for the time being, the cadastral reference number is not assigned until the developer of the building goes to the Notary office and registers it and then, the Cadastre office assigns a reference number for each one of the homes within such building.

The goal of General Directorate for the Cadastre is to have this new software tool ready before this summer, enabling a more dynamic system of reference number assignment, even before the building has been erected. Also, the Inland Revenue wants that the Notary Publics may accede to this software to immediately know this information at the moment of creating the titled deeds.

With regard to the power companies, the entry into force of the Fraud Prevention Act last 1st January obliges these companies to include in their power supply contracts the cadastral reference number, which shall make easier for the Inland Revenue to have a very relevant information as is the power consumption, so they may check if a property is inhabited or not and so find properties whose rents are not declared.

As for the former contracts, approximately 24 millions, this Act gives a deadline until the 1st July for the power companies to include the reference number in them; this process has not been started yet.