Return on real estate capital

The return on real estate capital must be declared annually

As usually happens, when something is in our name and gives us benefits, we are obliged to declare it annually. The return on real estate capital is no exception, Of course. Therefore it is important that we understand what exactly this concept is and how to calculate it. This information will not only be useful if we already have a property in our name, but also if we are thinking of buying one.

To help you with this issue, we will explain in this article what is return on real estate equity and how to calculate it. In addition, to understand the formula and be able to apply it, we must know what the reductions and deductible expenses of the properties in question are. I hope that this information is useful to you and that it clarifies what being the owner of a property, whether rural or urban, implies at the tax level.

What is return on real estate equity?

The return on real estate capital is the total income obtained from real estate

When we talk about the return on real estate capital, we basically refer to those incomes obtained from real estate, whether urban or rustic. All this income that we receive from real estate in our name must be declared each year in the IRPF (Income Tax on Individuals).

The return on real estate capital, according to the Tax Agency, encompasses all the income that has been obtained through real estate that are in Spanish territory throughout a year. These would be the following:

  • income from lease of urban or rural real estate.
  • derivatives of the assignment or constitution of rights on urban or rustic real estate.
  • Benefits obtained from enjoy or use of urban or rural properties.

In order for it to be considered as a return on real estate capital, it is essential to meet two conditions. First, the ownership of the real estate in question must correspond to the taxpayer. In addition, these real estate assets cannot be related to economic activities of the same taxpayer.

How are returns on real estate calculated?

The return on real estate capital is obtained by applying a formula

When calculating the return on real estate capital, we just have to apply a simple formula. Of course, before we must know the concepts that compose it and know what is applicable in our case and what is not. The calculation to obtain the net return is as follows, where CI is the real estate capital:

IC Net Income = IC Full Income – Reduction of IC Net Income – Deductible Expenses

Concepts

Let's now see what each concept is to know how to apply the formula correctly. The full return on real estate capital includes all the income obtained by the owner of the property, which implies the use, transfer and lease of real estate.

Regarding the reduction of the net yields of the real estate capital, it becomes very important in the cases of leasing of real estate destined for housing. In these cases, the net return is reduced by 60%. However, this reduction may only be applied to those positive net returns that have been calculated and submitted by the taxpayer before a data verification, verification and inspection process has been initiated.

Related article:
How to make the income statement?

Moreover there is the possibility of reducing 30% of the net return when the generation period of the same is greater than two years. This reduction can also be acquired if the net income is classified according to the rules as an asset obtained irregularly over time. This would be, for example, the compensation received by the transferee, tenant or sub-tenant for damage or damage caused to the property. Of course, they must be attributed to only one tax period. It should be noted that the amount of net income cannot exceed 300.000 euros per year.

What expenses are deductible to calculate the net return on real estate capital?

Finally we are left with deductible expenses. These are all those expenses that the taxpayer can deduct from the full income. They are the following:

  • Amortization, both of the property and of the assigned assets.
  • Additional repair and conservation of the property in question.
  • Expenses related to formalization of the contract and supplies.
  • Financing expenses and interests.
  • Doubtful balances: These are the amounts that the tenant has left to pay. Of course, at least six months must have passed since the collection attempt.
  • Services for the property: Includes surveillance, gardening, administration, etc.
  • Fees (garbage, cleaning), non-state taxes such as IBI, surcharges (except those that are sanctioning).
  • Others tax deductible expenses, such as theft, civil liability or fire insurance premiums.

It is true that when making the income statement they ask us for a lot of information. With so many concepts, numbers, and things to keep in mind, it can be quite a daunting task. If we are not sure that we are making the declaration correctly, we always have the option of hiring a manager.


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