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Rental Incomes and how to offset expenses

Find out what are some common expenses that you can offset against your rental incomes.

Common Expenses to Offset Against Rental Income

  1. Household Goods and Products:
  • Soap, cleaning products, toilet tissue.
  • Tea, coffee, napkins.
  • Medical kit contents.
  1. Maintenance and Repairs:
  • Any necessary repairs and regular maintenance costs with valid invoices.
  1. Services and Utilities:
  • Water, electricity, cleaning, etc., provided they are paid by the owner.
  1. Legal Fees:
  • Accountant and lawyer fees.
  1. Town Hall and Community Fees:
  • IBI tax, waste collection, street lighting.
  1. Insurances:
  • Insurance premiums related to the property.
  1. Depreciation of Long-Lasting Goods:
  • Depreciation of property and furniture based on their value and usage period.

Example Calculation

Let’s use an example to estimate your tax liability.

Input Data

  • Income during quarter: 1000€
  • Number of days rented: 15
  • IBI (annual): 780€
  • Repairs (valid invoice): 200€

Calculate Deductible Expenses

  1. Prorated IBI Tax:
  • IBI for rental period = (15/365) * 780 = 32.05€
  1. Repairs:
  • Total repair costs = 200€

Summary

  • Incomes: 1000€
  • Total Expenses: 232.05€ (32.05€ IBI + 200€ Repairs)
  • Balance: 1000€ – 232.05€ = 767.95€

Tax Liability Calculation

  • Tax Rate: 19% ( for EU citizens)
  • Tax Liability: 19% of 767.95€ = 145.91€

Depreciation

You can include as an expense the corresponding depreciation of assets (property, furniture etc.) that you make available in your rental. You will first need to know the value of these assets. 

To include depreciation:

  1. Determine the value of the assets:
  • Property value: Use the greater of the purchasing price or the property tax value.
  • Annual depreciation for property: 3% of the property value.
  • Prorate this annual depreciation for the rental period.

Example for Depreciation

  • Property tax value: Assume 100,000€
  • Annual Depreciation: 3% of 100,000€ = 3000€
  • Prorated Depreciation for 15 days: (15/365)* 3000 = 123.29€

Updated Summary with Depreciation

  • Total Expenses with Depreciation: 232.05€ + 123.29€ = 355.34€
  • Balance: 1000€ – 355.34€ = 644.66€
  • Tax Liability: 19% of 644.66€ = 122.49€

Treatment of Renovation Costs

Renovation costs are treated differently from routine maintenance and repair expenses. Here’s how they should be taken into account and their impact on property depreciation:

  1. Capital Improvement vs. Maintenance:
  • Maintenance and Repairs: These are routine expenses necessary to keep the property in good condition and can be deducted in full in the year they are incurred.
  • Renovations (Capital Improvements): These add value to the property, extend its useful life, or adapt it to new uses. Renovation costs must be capitalized and depreciated over time.

Capitalization of Renovation Costs

Renovation costs increase the basis of your property, which means they are added to the property’s value for depreciation purposes. This differs from regular maintenance expenses, which are fully deductible in the year they are incurred.

Depreciation of Renovation Costs

When you incur renovation costs, these costs are added to the property’s basis and depreciated over the useful life of the property. Here’s how to account for them:

  1. Determine the Total Renovation Cost:
  • Add all the costs related to the renovation project (materials, labor, permits, etc.).
  1. Add Renovation Costs to the Property Basis:
  • Sum the renovation costs with the original purchase price and other capital improvements to determine the new basis of the property.
  1. Depreciate the Total Value:
  • The entire new basis (original value plus renovation costs) is then depreciated over the property’s useful life according to the applicable depreciation schedule.

Example Calculation

Original Property Basis

  • Purchase Price: 100,000€
  • Initial Depreciation: 3% annually

Renovation Costs

  • Renovation: 20,000€

New Property Basis

  • Total Property Basis: 100,000€ (original) + 20,000€ (renovation) = 120,000€

Annual Depreciation Calculation

  • Annual Depreciation: 3% of 120,000€ = 3,600€

Prorated Depreciation for Rental Period

  • Number of Days Rented: 15
  • Prorated Depreciation: (15/365 * 3600 = 147.95€

Updated Summary with Renovation Depreciation

  1. Income: 1000€
  2. Expenses:
  • IBI (prorated): 32.05€
  • Repairs: 200€
  • Depreciation (original basis): ( \frac{15}{365} \times 3000 ) = 123.29€
  • Depreciation (renovation basis): 147.95€
  1. Total Expenses: 32.05€ + 200€ + 123.29€ + 147.95€ = 503.29€
  2. Balance: 1000€ – 503.29€ = 496.71€
  3. Tax Liability: 19% of 496.71€ = 94.37€

Summary

When you incur renovation costs, these costs should be capitalized and added to the property’s basis. The new basis is then depreciated over the property’s useful life. This process allows you to spread the deduction of the renovation costs over several years, reflecting the long-term value added to the property. This approach contrasts with immediate expensing of routine maintenance and repairs, which are fully deductible in the year they are incurred.

Alert!

Including property depreciation in your rent expenses will affect your tax liability if you sell your property in the future by reducing the purchasing cost and therefore increasing the profit. In essence,  what you save now you will pay at the time of selling, provided that the tax rate for non-residents remains the same.