Spain: Overview

RENTAL YIELDS

Last Updated: Jul 13, 2009

Unprofitable in Spain

Renting out continues to be rather unprofitable in Spain.

In Madrid, the gross rental yield on apartments still rather poor at 3.42%, reaching only up to 2.76% for larger apartments of 200-sq. m. and 3.86% for smaller properties of 75-sq. m.

In Barcelona, yields on apartments are slightly higher at 3.73% on average, with a 200-sq. m apartment generating a yield of around 2.64% only. Apartments in Barcelona are just a little less expensive, at €4,368 per sq. m.

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TAXES AND COSTS

Last Updated: Nov 20, 2007

Taxes are high in Spain

Effective Tax Rate on Rental Income
Monthly Income	€1,500	€6,000	€12,000
Tax Rate	24%	24%	24%
Click here to see a worked example
Source:			Disclaimer

Rental Income: All property owners are subject to a flat tax of 24% on gross rental income.

Property and Wealth: A special annual 3% tax is levied on the cadastral value of real estate owned by non-residents. Property owners are also liable to Net Wealth Tax and Real Estate Tax levied by the municipal government.

Capital Gains: Non-residents pay a flat rate of 18% on the capital gains tax.

Inheritance: Each beneficiary’s inheritance is taxed at progressive rates (7.65% - 34%) after certain tax-free amounts have been deducted.

Residents: Resident individuals are liable to tax on their worldwide income and assets but they are entitled to some allowances and tax credits.

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BUYING GUIDE

Last Updated: Mar 28, 2007

Total transaction costs are moderate in Spain

The total roundtrip transaction cost is around 10% to 14%. This includes the Property Transfer Tax (6% or 7% depending on the autonomous region) and the real estate agent’s commission, which is around 2.5% to 3%.

For new properties, VAT is imposed instead of transfer tax. VAT for vacant land is 16%, while VAT is 7% for new houses, plus stamp duty. It is advisable to buy land with a house under construction or finished to minimize tax liability.

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LANDLORD AND TENANT

Last Updated: May 25, 2006

Law and slow courts benefit tenants

Spain’s rental market is extremely pro-tenant.

Rent Control: The landlord and tenant have the contractual freedom to fix the rent and state the due date of payment. However, rent increases are tied to the Consumer Price Index and limited to once a year.

Tenant Security: The 1994 Urban Tenancy Act aimed to restore balance between the interest of landlords and tenants. It failed. Tenants are guaranteed tenure for five years. Courts are painfully slow in resolving cases of tenant eviction and compensation for rental arrears and damages.

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ECONOMIC GROWTH

Last Updated: Nov 06, 2008

Higher budget deficit or deeper recession?

Spain is a modern industrial country with a GDP per capita of US$35,116 in 2008 and a population of 45.6 million. Spain joined the European Economic Community in 1986 and was one of the founder members of the European Monetary Union in 1999. In 2002, Spain achieved full monetary union with the EU and adopted the Euro.

After 3.5% GDP growth annually from 2003 to 2007, the economy has slowed dramatically in 2008 (0.86% GDP growth). It is expected to contract by as much as 3.2% in 2009 and 1% in 2010.

The construction industry is a key driver of the Spanish economy. The increase in construction activity in the past helped pull unemployment down to 7.95% in Q2 2007 from 24% in 1994. With the situation now reversed, the unemployment rate stood at 19.7% in September 2009, one of the highest in EU. It is expected to exceed 21% in 2010, the highest rate since 1997.

In October 2009, the government approved an additional €5 billion public spending programming to stimulate the economy. This was on top of the €11 billion stimulus package announced in November 2008.

But to pay for the stimulus program and recover the lost income from falling economic activity, the government is also pushing for a €11 billion tax hike. It include increases in VAT, capital taxes and dividends. The €400 tax rebate given to taxpayers staring in 2008 will also be phased out. These measures can push the economy into a deeper recession.

The Spanish government is facing a tough policy dilemma. It has to stimulate the economy but it also needs to control the deficit. Since the 1980s, the Spanish government chronically runs a deficit. It only broke into surplus in 2005, 2006 and 2007, with the biggest surplus of 2.7% of GDP.

However, the global recession pushed the economy into deficit once more; at 3.8% of GDP in 2008. In 2009 and 2010, the deficit is expected to exceed 12% of GDP, way beyond the EU limit of 3% of GDP.