2020 personal income tax and wealth tax filing season: how to depreciate inherited or gift properties
In the tax information and on the draft return that the finance authority will make available to taxpayers, greater details will be provided of income obtained from rental property, including a calculation of depreciation expense. The Spanish finance authority, calculates the depreciation expense for inherited or gifted properties only on the cost of investments and improvements made on the property and the expenses and taxes associated with its acquisition.
The March 18, 2021 edition of the Official State Gazette (BOE) published Order HAC/248/2021, of March 16, 2020, approving the 2020 personal income tax and wealth tax return forms. The standard time period for filing the draft personal income tax return and the returns for the two taxes runs between April 7 and June 30 2021.
However, if the taxpayer elects to pay from their bank account, as a general rule, the time period ends on June 25, 2021. As an exception, the time period ends on June 30, 2021 for personal income tax returns on which it is elected to pay in two installments, if only the second payment will be taken from the taxpayer’s bank account.
Starting on April 7, tax information and draft personal income tax returns may be obtained on AEAT’s (Spanish Tax Agency) website.
The order states that the finance authority has enhanced the information it provides to taxpayers, among other elements, in relation to income from movable capital, including calculation of the depreciation expense for properties from the information provided on the 2019 return. In relation to this depreciation expense, however, it needs to be taken into account that the method AEAT has been using for inherited or gifted properties is already been questioned by the courts:
The law states that amounts entered for the depreciation of rented properties are deductible, provided they relate to their actual loss in value. Depreciation meets this actual loss in value test for these purposes if it does not exceed a figure obtained by multiplying the higher of the acquisition cost paid or the cadastral value (not including the land value) by 3%.
In relation to the definition of “acquisition cost paid”, the tax authorities have been arguing that the acquisition of an asset by gift or inheritance does not entail any cost for the person acquiring them, other than the taxes or expenses associated with the acquisition. For that reason, they consider that the depreciation basis consists only of those taxes and expenses and, if applicable, the cost of any later improvements or investments made on the property. The 2019 personal income tax return filing program was in fact designed for the depreciation of inherited or gifted properties to be calculated in this way and the depreciation calculated in the 2020 information will foreseeably be based on that interpretation.
Some courts and tribunals (including economic-administrative tribunals) have already been construing, however, that the value having to be taken as “acquisition cost paid” is the actual value of the asset, in other words, the value that was taken for inheritance and gift tax purposes, plus the taxes and expenses associated with the acquisition and any relating to subsequent investments. A few of the most recent are the decision by the Valencian Regional Economic-Administrative Tribunal (TEAR), on November 26, 2020 (see here), the decision by Andalusia TEAR on December 11, 2020; or the rulings by Valencia High Court (judgment of May 30, 2019) and Andalusia High Court (judgment of March 12, 2019).