September 7, 2026
At Muppy, we repeat a phrase every time we analyze an investment deal: "Rental income isn't about what you collect, it's about what you declare." This isn't just a clever remark. When renting out a property, you aren't taxed on your gross income, but on your net yield—income minus deductible expenses and depreciation—and your marginal tax rate is then applied to that net figure. Every euro of expense you fail to deduct, every bit of depreciation you don't account for, and every renovation you misclassify translates into overpaid taxes and lost net profitability, year after year, for the entire life of the investment.
This article is the complete technical guide to the first piece of that puzzle: deductible expenses and depreciation. We have written it with the level of detail that a property investor needs, because in rental taxation, the devil is literally in the details. This is the first in a four-part series: here we cover expenses and depreciation; in the following articles, we will cover the Article 23.2 reduction, ownership structure (individual vs. corporate), and tax considerations for non-resident investors.
1. The starting point: what is real estate capital income
For a resident taxpayer, income from renting out a property is classified as real estate capital income (RCI). Unlike interest or dividends—which fall under savings income and are taxed at rates between 19% and 30%—RCI is added to your general tax base and taxed at your marginal rate, alongside your other income (such as wages or business income). In higher tax brackets, that marginal rate can exceed 45%-47%, depending on the autonomous community.
This inclusion in the general tax base is the fundamental reason why expense deductions, depreciation, and the Article 23.2 reduction matter so much: every euro you deduct from your net yield is a euro you stop paying taxes on at your marginal rate. That is why, for the serious investor, rental taxation is not just an administrative chore in May, but a profitability lever to be managed year-round.
The calculation formula is as follows: gross income − deductible expenses − depreciation = net yield. For residential rentals, the Article 23.2 reduction is then applied to the positive net yield to arrive at the reduced net yield, which is what is ultimately added to your general tax base. In this article, we cover the first two steps (expenses and depreciation); the reduction has its own dedicated article in this series.
2. The general principle of deductibility
For an expense to be deductible from RCI, three conditions must be met. First, it must be a necessary expense for generating the income (linked to the rented property and the rental activity itself). Second, it must be temporally correlated with the income, meaning it must correspond to the period in which the property generates rent (subject to the proration rules for vacancy periods). Third, and decisive in the event of an audit, it must be documented: a full invoice, receipt, contract, or proof of payment. A real expense that is undocumented is, for all practical purposes, an expense that does not exist in the eyes of the tax authorities.
It is worth internalizing this logic because it governs everything else: it is not about "finding" expenses, but about correctly deducting what the law allows, with proper support, in the correct tax year, and while respecting specific limits.
3. Deductible expenses, one by one
We will review each category with its technical nuance, as almost all of them have a detail that makes all the difference.
3.1. Interest and financing costs
Interest and other financing costs for capital borrowed to acquire or improve the property are deductible (this includes mortgage interest for the purchase, as well as loans to finance renovations). Note: you deduct the interest, not the principal repayment, which is not an expense but a debt repayment. These interest payments are subject, along with repair and maintenance costs, to the combined limit set by Article 23.1 (see point 5).
3.2. Non-state taxes and fees
Property tax (IBI), waste collection fees, sewage fees, curb-cut fees, and similar charges are deductible, provided they are levied on the income or the property and are not punitive in nature. Penalties, late-payment surcharges, and interest on late payments of a punitive nature are not deductible.
3.3. Homeowners' association fees
Ordinary association fees are deductible in the current tax year. Be careful with special assessments: if they fund conservation or repair work, they are deductible (within the 23.1 limit); if they fund an improvement (for example, installing an elevator where there wasn't one before), they are not deductible as a current-year expense, but rather increase the value of the property and are recovered through depreciation.
3.4. Insurance
Premiums for home insurance, rental default insurance, and liability insurance linked to the rented property are deductible. The expense is deductible for the period during which the property is rented (with proration if there is a vacancy).
3.5. Repairs and maintenance
Repair and maintenance expenses intended to maintain the normal use of the property. This is one of the most important and closely monitored categories; we dedicate point 4 entirely to it due to its blurred line with improvements.
3.6. Personal and management services
Fees for property management, rental management, concierge services, security, or gardening attributable to the leased property. If you delegate management to a third party (as we do at Muppy), those fees are a deductible expense.
3.7. Utilities
Water, electricity, gas, etc., only for the portion assumed by the owner and not passed on to the tenant. It is standard for the tenant to pay these; if the owner assumes them by contract, they are deductible.
3.8. Legal and formalization expenses
Drafting and formalizing contracts, and legal defense expenses related to the lease (for example, eviction proceedings or rent claims).
3.9. Doubtful debts
Doubtful debts can be deducted when the debtor is in bankruptcy proceedings, or when the number of months established by regulation (usually six) has elapsed between the first collection attempt and the end of the fiscal year. If the balance is collected later, it is recorded as income in the year of collection.
3.10. Depreciation
Depreciation of the property and the assets included with it (furniture, appliances). Due to its importance and complexity, it has its own section (point 6).
4. Repair/maintenance vs. improvement (opex vs. capex): the boundary that causes the most contingencies
This is, by far, the point that triggers the most adjustments during rental audits. The law distinguishes between:
The rule of thumb we use: if after the work the property remains as it was (only repaired), it tends to be maintenance; if it is better than it was (more value, longer useful life, new functionality), it tends to be an improvement. Common gray areas: a comprehensive renovation of a very deteriorated apartment usually has an improvement component; replacing an old boiler with an equivalent one is a repair, but replacing it with a superior system that improves efficiency may have an improvement component.
How to defend it: project report, invoices broken down by line item, before-and-after photographs, and consistency with what has been declared. A well-documented renovation allows you to separate the maintenance portion (deductible) from the improvement portion (depreciable) and support it if there is an audit.
5. The Article 23.1 limit and its four-year carryforward
Financing interest and repair and maintenance expenses have a combined limit: in any given tax year, the sum of both cannot exceed the total gross income from the property. Other expenses (property tax, standard homeowners association fees, insurance, management, and depreciation) fall outside this limit and can even result in a negative net return.
The key takeaway: the excess is not lost. It can be deducted over the following four tax years, subject to the same annual limit.
Carryforward example
A property generates €9,000 in annual income. In that same year, it incurs €7,000 in interest and €5,000 in repairs and maintenance (€12,000 total subject to the limit). Since the cap is €9,000 (the gross income), you can only deduct €9,000 for these two items this year; the remaining €3,000 is carried forward. Over the next four years, you can deduct that excess by adding it to the interest and repairs of each of those years, provided you respect the gross income limit for each year. For highly leveraged operations or those with significant initial renovations, planning for this carryforward represents real money that many investors otherwise lose due to a lack of awareness.
6. Depreciation in depth
Depreciation reflects the loss in value of a property due to use and the passage of time, and it is deductible even though it does not involve an actual cash outflow. It is arguably the most powerful expense and the one most frequently overlooked.
6.1. The rate and the base
Property depreciation is generally calculated at an annual rate of 3% on the higher of two figures: the acquisition cost paid or the cadastral value, in both cases excluding the value of the land. Only the structure is depreciated, not the land (land does not depreciate).
6.2. How to separate land and structure
The ratio between the value of the land and the structure is usually taken from the property tax (IBI) receipt, which breaks down the cadastral value into both components. That ratio (e.g., 30% land / 70% structure) is applied to the relevant figure (cost or cadastral value) to isolate the depreciable portion. Determining this ratio correctly is not a minor detail: it dictates the depreciation for all years of ownership, which can span decades.
6.3. Properties acquired through inheritance or gift
A highly technical point for family estates, clarified by case law: for properties acquired for free (inheritance or gift), the depreciation base for the structure is not the total value declared for Inheritance and Gift Tax purposes, but rather the expenses and taxes inherent to the acquisition paid by the recipient (notary fees, registry fees, the tax itself, etc.), plus the cost of investments and improvements. Applying this incorrectly—by using the total tax value—is a common error that can lead to tax audits. It is advisable to review this with an advisor.
6.4. Depreciation of furniture and fixtures
Moveable assets provided with the property (furniture, appliances, equipped kitchen) are depreciated separately according to depreciation tables at a faster rate than the property (around 10% per year, i.e., over about ten years). In a furnished mid-term rental, for example, this furniture depreciation adds up to a significant deduction.
6.5. Time-based proration
Depreciation is calculated based on the days the property was actually rented. Vacancy days do not generate depreciation that can be deducted as a rental expense (and, furthermore, they trigger imputed income, see point 7).
7. Periods without a tenant: imputed real estate income
A nuance that surprises many investors and is a common source of tax adjustments. For the days the property is not rented and is not your primary residence, the tax authorities impute a deemed real estate income: 2% of the cadastral value, or 1.1% if the cadastral value has been revised in the last ten years. That amount is prorated by the number of days the property was available and is taxed as part of your personal income tax (IRPF).
Practical consequences: an empty property not only generates no income but also incurs taxes; furthermore, the year's expenses and depreciation must be prorated between the rented period (deductible against rental income) and the period the property was available (which is subject to imputed income and does not allow for those deductions). This is one more fiscal argument—in addition to the economic one—to minimize vacancy, something that professional management addresses at the root.
8. Offsetting negative returns
If, after applying expenses and depreciation, the net return on the property is negative (common in years with renovations or high vacancy with a mortgage), that negative result is integrated and offset against the general tax base of the personal income tax (IRPF) along with other income of that nature (for example, employment income or business activities), subject to the limits and integration rules for the fiscal year. It is not lost, but it is offset against the general tax base, not the savings tax base.
9. Three case studies
Case A · Apartment with a high mortgage in a renovation year
You buy an apartment to renovate and rent out. In the first year, you incur high interest and significant maintenance work, and the property is only rented for half the year. Result: the interest + repairs exceed the gross income (subject to the 23.1 limit), so part is carried forward to the next four years; depreciation and property tax (IBI) are prorated based on the days rented; and for the half-year it was available, imputed income applies. A fiscally "bad" year in appearance that, if well-planned, leaves deductions loaded for the future.
Case B · Inherited apartment
You inherit an apartment that is already rented. Your depreciation base for the building is not the value used for the Inheritance and Gift Tax (ISD), but rather the expenses and taxes you paid for the inheritance (ISD, notary, registry) plus any improvements you make, also applying the land/building ratio. Calculating this correctly avoids an inflated depreciation that the tax authorities would later adjust.
Case C · Furnished mid-term rental
You rent out a furnished property for seasonal periods. You depreciate the property at 3% (on the building value) and, in addition, the furniture at its own rate (around 10%); you deduct management, insurance, and utilities that you cover; and, since it is not the tenant's primary residence, you do not apply the reduction under Art. 23.2 (we will cover this in article 2/4). The sum of these depreciations significantly increases the total deductible expense.
10. Documentation: how to support all this before the tax authorities
11. Mistakes we see as operators (and how to avoid them)
12. How we handle it at Muppy
As an operator, we treat rental taxation as part of the return, not as an afterthought. We keep documentation in order, calculate depreciation by separating land value (and using the correct base for inheritances), classify every renovation with precision, monitor the article 23.1 limit and its carry-forwards, and minimize vacancy, also due to its tax impact. All of this is reflected in the net profitability—after taxes—that we present to each investor: the real figure, not the one in the brochure.
Do you want to estimate your net profitability after taxes? Use our calculator and speak with an advisor to review your specific case.
13. Quick glossary
On the higher of the acquisition cost paid or the cadastral value, excluding the value of the land. The land/building ratio is usually taken from the property tax (IBI) bill.
The amortization base for the building consists of the expenses and taxes inherent to the acquisition (inheritance tax, notary, registry) plus improvements, not the total inheritance tax value; the land/building ratio must also be applied.
Only the maintenance/repair portion (subject to the limit in Art. 23.1); the improvement portion increases the property's value and is amortized. Both components must be separated and documented.
No rental expenses are deductible for those days, and imputed real estate income (2% or 1.1% of the cadastral value, prorated) is applied. Annual expenses are prorated between the rented period and the period the property is available.
No. The excess can be deducted over the following four fiscal years, respecting the limit of the property's gross income each year.
It is integrated and offset against the general personal income tax base with other income of that nature, according to the rules for the fiscal year. It is not lost.
At least for the statute of limitations period (four years), though it is advisable to keep them longer if you have carryforwards under Art. 23.1 or pending depreciation that depends on data from previous years.
