Risks to Avoid When Investing in Real Estate for Short-Term Tourist Rentals in Spain

05.2017

Rental of Real Estate for Tourist Use in Spain

In recent years, property and office prices have been rising steadily, particularly in large cities such as Barcelona. Many buyers—whether individuals or family-owned entities, resident or non-resident in Spain—have allocated part of their savings to purchasing residential properties intended for short-term tourist rentals, attracted by the strong appeal of destinations such as Barcelona. Unfortunately, it must be noted that both property owners and the Spanish tax authorities are prone to significant mistakes in this area from a tax perspective, and all of this based on our professional experience derived from tax audits of some of our clients.

Tourist property rentals without VAT

One of the most common issues concerns the VAT treatment of short-term tourist rentals or rural holiday homes. These rentals are, as a rule, exempt from VAT. Consequently, any input VAT paid (for renovations, repairs, or related services) is not deductible. Only where the property owner provides services comparable to those of a hotel will the rental be subject to VAT, thereby allowing the deduction of related input VAT.

There is no general definition of what qualifies as “hotel-like services.” However, the tax authorities have provided some guidance, indicating that such services include, for instance, maintaining a staffed reception operating on a regular basis, daily housekeeping, or laundry services. If these services are not offered, the rental is VAT-exempt.

Deductibility of expenses

Another recurring and contentious issue is the deductibility of expenses incurred in the operation of each property. A significant number of our clients have undergone tax audits of their Spanish personal income tax (IRPF) returns following information provided to the tax authorities by rental platforms such as Airbnb. One of the main disputes concerns the rejection of many property-related expenses on the grounds that the taxpayer allegedly failed to demonstrate a direct and exclusive link between the expense and the property.

In practice, this has led to absurd situations. For example, the authorities have refused to accept the deduction of expenses for toilet paper, furniture, or lighting fixtures, claiming that the owner’s family may have appropriated these items for private use. Taken literally, such reasoning would imply that the family possessed five double beds, half a dozen bunk beds, enough toilet paper for several years, dozens of identical lamps, several microwaves, and hundreds of kitchen utensils.

This reflects what might be termed a “diabolical proof” requirement: the tax authorities expect the taxpayer to prove that they have not removed these items from the rental property—a logically impossible task. One cannot prove that something was not done.

Moreover, if the investment is made by an individual rather than a company—through the personal income tax (IRPF) rather than the Corporate Income Tax—the situation worsens. The IRPF system is not designed for complex bookkeeping, unlike the Corporate Tax framework, where recorded expenses enjoy a presumption of validity. Under IRPF rules, only strictly indispensable expenses are accepted, excluding many costs that are objectively necessary for the activity. This leads to unreasonable distinctions: for example, if the landlord provides bottles of good wine to guests (which often enhance guest reviews on online platforms), such expenses would only be deductible under Corporate Tax rules, not under IRPF.

Depreciation of property and assets

Another significant source of conflict, particularly for its financial impact, is depreciation. Under Spanish IRPF, an annual depreciation rate of 3% applies to the construction value (excluding the land) when the property is rented. However, for short-term rentals through platforms such as Airbnb, the tax authorities argue that depreciation should only be calculated for the days actually rented.

Yet this raises a fundamental question: do hotels not depreciate their rooms for the entire year, even if some days the rooms are vacant? Should the same logic not apply to tourist apartments, which—especially in a city like Barcelona—enjoy occupancy rates between 85% and 95% annually? Should these properties not be depreciable for the full year, given that they are available for rental throughout the year, just as rental cars or hotel rooms are?

Furthermore, distinguishing between renovation expenses (subject to depreciation over 33 years at 3% annually) and improvement expenses (subject to depreciation over 5 years at 10% annually) is often extremely complex, as invoices seldom specify such details. The tax authorities typically require that even minor refurbishment works be depreciated over 33 years—as if a hotel bathroom did not require renovation at least every five years. How could a hospitality business remain viable with rooms and bathrooms left unchanged for 33 years?

When it comes to depreciating or replacing furniture (beds, sofas, lamps, etc.), the same problem reappears: the authorities often assert that these items are not actually present in the property because the owner cannot prove they have not been removed for private use. Consequently, these expenses are disallowed for lack of proven connection to the rental activity.

Tax treatment of tourist rentals

The core issue lies in the Spanish tax authorities’ position that such rentals do not constitute a “business activity,” which leads to a highly restrictive approach to the deductibility of related expenses. At the same time, the authorities fully recognize all gross rental income—figures that, in Barcelona, are substantial: typically between EUR 28,000 and EUR 40,000 per year for modest but well-located properties of around 60–80 square meters.

What will happen when the local financing framework is reformed and, as the City of Barcelona demands, these properties are taxed under the local property tax (IBI) at rates equivalent to hotel businesses? Will they then be considered “businesses” for tax purposes?

In conclusion, the IRPF framework governing the taxation of rental income is ill-suited to this evolving form of economic activity. The tax administration should recognize that the traditional criteria used for ordinary residential leases are inapplicable here and should therefore adopt a new interpretative approach—one that allows for a more rational assessment of evidence and expenses consistent with the economic reality of short-term tourist rentals.

++ Article originally published in German in the magazine “Economía” (April 2017), issued by the German Chamber of Commerce in Spain ++