The case that we are analyzing today is common. The tenant stops paying the rent and, once he leaves the apartment, the damage and flaws in the apartment have a repair cost much higher than the deposit. In addition, when the time comes to file the tax returns, the owner have to pay taxes on rents that have not even been collected.
Is there a way to mitigate the tax burden? This is the essential question that we are going to answer below through binding Tax Ruling V0458-22, of March 10, 2022.
In principle, the income obtained from the rental, when they are unrelated to a professional activity (it is understood that they are the result of the professional activity when we have at least one person hired dedicated to the management of the properties), must be included as income from real estate (articles 22.1 and 27.2 Tax Act “LIRPF”). And the same happens if we withhold the deposit from the former tenant precisely to make the repairs.
However, the law itself provides (art. 23.1 to LIRPF) the deduction of expenses necessary to maintain the habitability of the home. For example, painting, replacing an element such as the elevator, heating, etc., always, of course, with the limit of what has been collected from the lease. The expenses incurred for the improvement and enlargement are not deductible for this concept (yes for the concept of amortization).
The problem is that these deductible expenses, while there is income and are being collected, can be deducted without any problem. But in our case study, the expenses are made once there is no rent, because the lease has ended, and we still have rents due from the last year.
What about these deductible expenses? At this point we must pay attention to two things.
First, we must say that the unpaid rents must be included in the taxable real estate income, taking into account that, if from the time any collection procedure has been carried out (for example, serving a call for payment via burofax) until the end of the tax period ( December 31) more than 3 months have passed, unpaid rent may not be included as income for tax purposes. Once they are collected they must be allocated to the tax period in which the collection is made effective. Therefore, it is advisable to serve a formal call for payment, even if only for tax purposes, and to avoid paying income tax for what has not been cashed.
Secondly, regarding repair expenses, if there has been real rental income in the same year in which the expenses have been made, they can be deducted from this income without any problem. But if the expenses are higher than the real income, this excess can be carried forward 4 years.
Nor should we forget that all repair and conservation expenses will be deductible as long as they are for the purpose of leasing the property, even when in the year in which they are made we are unable to obtain any rental income, in which case, as before , these expenses can be carried forward 4 years. But beware, because if the house is not rented, and the owner uses it for his personal use, he would lose the right to that deduction.
Finally, a piece of advice: any expense must have document evidence. Invoices and proof of payment, which must be by bank transfer if it is over €1,000 (VAT included), don’t forget. And, if possible, a contract or written instruction for the work, repair, etc., so that it is clear why the work was done and where. The burden of proof of any tax-deductible item is always on the taxpayer’s side.
Do you have doubts about the declaration of income derived from rentals? Has your tenant stopped paying and you don’t know how to recover all the money? We are at your disposal to advise you on all these issues and to collect the rent due with the best possible strategy.