This article was translated automatically from Italian.
Taxes on rental income: what taxes does the property owner pay?
Owning a property is undoubtedly an excellent investment, but we are well aware of the costs that have to be met to maintain it and of the taxes that must be paid to the tax authorities simply for owning it, or even if it brings us a profit.
Indeed, precisely in the case of a sale or a letting, the owner will have to pay the tax authorities a percentage of the proceeds:
How many taxes apply to lease agreements, and which ones?
How are they calculated and what rates are applied?
Below we will try to answer all these questions, to remove any possible doubt about the taxation that falls on the owners of properties let to third parties.
The taxation of lease agreements
If you decide to let any premises, house or flat, you will have to pay the Italian tax authorities a percentage of the proceeds. The owner can choose between two different types of taxation: ordinary taxation or the flat-rate regime (cedolare secca).
Ordinary taxation of rents
what taxes are paid on a rentalBy choosing this regime, you decide to declare the proceeds from the lease agreement for Irpef (personal income tax) purposes. Personal income tax is calculated by applying a progressive rate based on what the taxpayer declares.
Taxable income is made up of all the sums of money received by the individual during the tax year, including, of course, the income from letting properties, which is therefore added to the other income received.
Irpef is a direct, progressive tax with increasing rates. The tax system provides for 5 brackets, with the relative tax rates divided as follows:
first bracket with a rate of 23% and income between 0 and 15,000 euros;
second bracket with a rate of 27% and income between 15,001 and 28,000 euros;
third bracket with a rate of 38% and income between 28,001 and 55,000 euros;
fourth bracket with a rate of 41% and income between 55,001 and 75,000 euros;
fifth bracket with a rate of 43% and income above 75,000 euros.
It is important to know that, from the second bracket, the rate provided for is applied only to the portion of income that exceeds the previous bracket. This means that if a person declares, for example, 30,000 euros, the tax due will be calculated as follows:
23% on 15,000 euros;
27% on 18,000 euros;
38% on 2,000 euros.
As stated, all income deriving from lease agreements on any property owned contributes to determining and increasing taxable income for Irpef purposes.
How to calculate taxable property income
To calculate property income for Irpef purposes, you must consider the higher amount between:
the cadastral income revalued by 5%;
the annual rent reduced by 5%.
There are, however, some special cases in which the calculation provides for:
50% of the revalued cadastral income and the annual rent reduced by 35%, for properties of historical and artistic interest;
the annual rent reduced by 25% for all buildings located in the historic centre of Venice and on the islands of Giudecca, Murano and Burano;
the annual rent reduced by 30% for agreed-rent lease agreements on properties located in municipalities with a high population density. If the building is also located in a historic centre, the rent to be considered for Irpef purposes will be reduced by 65%.
How ordinary tax on rents is paid
Tax on rental income is paid through the tax return. The sum received must be entered in section B of form 730 or in section RB of the Unico form.
One aspect not to be overlooked concerns lease agreements where rent has not been received because of the tenant's arrears. In these cases the income must still be declared and contributes to determining the taxable amount for Irpef purposes.
Only if the eviction validation procedure has been completed can the owner avoid including the unreceived rent in taxable income; however, the cadastral income of the property must be declared.
It should be remembered that anyone who chooses this tax regime must also allow for payment of the registration tax of 2% on the annual rent multiplied by the number of years. This tax must be paid when the contract is registered and in the event of an extension.
Taxation of rents with the flat-rate regime (cedolare secca)
The cedolare secca is the method of taxation for rents that is an alternative to the ordinary tax regime. Anyone who decides to let a property by opting for the cedolare secca is not required to declare the income for Irpef purposes or to pay further taxes on the earnings deriving from the property; nor is there any obligation to pay registration tax and stamp duty for the registration, extension or termination of the tenancy agreement.
The tax is calculated by simply applying a substitute tax at a rate of 21% on the annual rent. A reduced rate of 15% (lowered to 10% for the period 2014/2017) is also provided for agreed-rent contracts relating to properties located in municipalities with housing shortages, with high housing demand or in a state of emergency following disasters.
The cedolare secca can be chosen only by individuals who hold the right of ownership or a real right of enjoyment over the property (as in the case of usufruct). All business, arts or professional activities are excluded. The option to be taxed through the cedolare secca can be exercised when the contract is registered but also afterwards; it is valid for the whole duration of the agreement and, in the case of automatic extension, the choice will have to be confirmed.
Who benefits from the cedolare secca?
This type of taxation is particularly advantageous for those who own many rental properties or have a particularly high taxable income. By opting for the cedolare secca, the owner gives up the right to update the rent (including any Istat adjustments) and cannot benefit from any deductions and tax credits for the entire duration of the contract. However, the saving in terms of the tax rate is truly considerable, and it increases progressively as the owner's taxable income rises.
To appreciate the real advantages that a property owner with several properties can have compared with someone with a single lease, a simple example is enough.
Let us suppose that Mr Rossi owns just one flat and rents it out for 1,000 euro a month, for a total annual income of 12 thousand euro.
Mr Bianchi, on the other hand, owns 10 flats and lets them out, again at 1000 euro a month each, so with an annual income of 120 thousand euro.
If Mr Rossi applied the cedolare secca at 21%, he would have to pay a substitute tax of 2,520 euro. If instead he had opted for ordinary taxation, calculating the rate of 23% plus the registration tax of 2%, the amount to pay would be exactly 2862 euro. All things considered, the cedolare secca would result in a saving of 12%.
Looking instead at the case of Mr Bianchi, with the cedolare secca he would have to pay 21% of 120 thousand euro, that is to say 25,200 euro. If instead he decided to declare the property income for Irpef purposes, he would fall into the top bracket with the applicable rate of 43% on the income above the threshold, which, added to the registration tax of 2%, would lead to a total tax charge of 44,590 euro. The saving with the cedolare secca would be 43.5%.
The numbers don't lie and speak for themselves: for very low incomes the saving is minimal, but for high ones the cedolare secca almost halves ordinary taxation.
Taxation and rules for lettings to students
For those who own property in university cities, the possibility of letting to students is an excellent source of income, made even more appealing by the opportunity to take advantage of significant tax breaks.
Law 431 of December 1998 provides for a particular temporary contract for university students. This type of lease offers, on the one hand, tax breaks for the owner and, on the other, tax credits for the tenant. The contract lasts from a minimum of 6 months to a maximum of 3 years. At the first expiry, it is renewed automatically for the same length of time.
The tax advantage for the tenant is notable, as they can opt for a cedolare secca with a rate of 10%. The saving is clear, both compared with ordinary taxation and with the cedolare secca at 21% for standard leases.
The owner can enjoy further advantages, namely:
the taxable income from the rented properties can be reduced by 30%. This is on condition that the person who intends to benefit from the tax breaks states, in the tax return, the registration details of the contract, the municipality where the property is located and the year in which the IMU return was submitted.
a 75% reduction in the municipal rate for IMU and TASI.
Student tenants benefit from an Irpef tax credit of 19% on the rent paid, with a limit of 2633 euro a year and a maximum saving of 500 euro.
To sign a temporary contract for university students, three requirements must be met:
the residence of the student tenant must be different from the one where the property to be let is located;
the residence of the student tenant must be explicitly stated in the temporary lease;
there must be a university or a branch campus in the municipality where the property is located.
Renting out a property: an excellent source of income, but take care to choose the right taxation
Renting out one or more properties is without doubt an excellent source of income. The only thing to consider is which type of taxation to choose. As we have seen in the relevant section, the cedolare secca is, broadly speaking, the most convenient tax method.
If you are lucky enough to own a large number of properties, the possibility of using the fixed rate of 21% offers, all things considered, a saving of almost 50% compared with the ordinary tax system. For a single flat to let, the tax is reduced by a few hundred euro.
In this case, bearing in mind that the cedolare secca makes it impossible to update the rent for the entire duration of the contract, the initial saving could turn into a disadvantage over the long term.
Other aspects not to be underestimated are the tax breaks on leases for properties at agreed rents and lettings to university students: all situations that offer significant tax discounts to the owner.
Alessandro Langella
Founder of Pavé, Milan
He knows Milan through years of hands-on market experience, properties visited and neighbourhoods watched as they changed.
