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Is the Inland Revenue cheating quantifying returns on real estate capital?

| News | Tax

This year the web site asks us for additional information and calculates the deductible amortization of the property acquired by inheritance or donation

A few days ago, an acquaintance told me that he was trying to do the income tax declaration and, on the Tax Office website, the return corresponding to a rented property gave him a higher result than he calculated on a simple spreadsheet. When we go into detail, the problem arises because this year the web site asks us for additional information and does us "the favour" of calculating the deductible amortization of the property acquired by inheritance or donation, which happens to be an expense less than desired by the angry taxpayer.

Who is right, the Tax Office or the taxpayer who has seen his tax bill increase? From my point of view the taxpayer for two reasons, one formal and another material or substantive.

Let us start with the formal one, who has to qualify and quantify personal income tax in a voluntary period, the Tax Office or the taxpayer? If it is the former, we would be facing a liquidation and if it is the latter, a self-assessment. Well, the answer is in Article 97 of the Personal Income Tax Act which provides that "taxpayers, when filing their return, must determine the corresponding tax debt and pay it in the place, form and time periods determined by the Minister of Economy and Finance," and Article 120 of the General Tax Act defines self-assessments as "returns in which the taxpayers, (...) carry out by themselves the operations of qualification and quantification necessary to determine and pay the amount of the tax debt (...)".

From a formal point of view, having chosen to require a self-assessment on personal income tax, it is the taxpayer who has to qualify and quantify the tax debt, and it is the taxpayer who has to decide the depreciation base of the rented property and, where appropriate, the Tax Office can check whether or not this self-assessment is correct and carry out the administrative settlement. Therefore, the taxpayer, who is obliged to make a self-settlement but is not allowed to qualify and quantify it, has grounds to be angry, because if it is the Tax Administration that qualifies and quantifies it should be exempted from the obligation to make a self-settlement.

And from a material or substantive point of view, the taxpayer also has reason to be very angry, since the criterion followed by the Tax Office to determine the depreciation base of rented goods, and which were acquired by inheritance or donation, is not a peaceful issue, so the taxpayer when making a self-assessment must be able to follow the criterion that he considers to be in accordance with the law.

To understand the problem, we can refer to the information provided by the Tax Agency on its website, information that follows the doctrine of the Directorate General of Taxes (V1259-09, of 27th May), and that, in short, only admits as an amortization base "in the acquisition of property by inheritance or donation the part of the expenses and taxes inherent to the acquisition that corresponds to the construction and, where appropriate, all investments and improvements made”.

However, the Tax Agency's website does not indicate that this is an interpretation of Article 23 of the Personal Income Tax Act by the Administration, an interpretation that, as we shall see below, is being questioned by our courts. 

In fact, the aforementioned article 23 tells us that "it is understood that depreciation meets the effectiveness requirement if it does not exceed the result of applying 3 percent to the greater of the following values: the acquisition cost paid or the cadastral value, not including the value of the land". 

And the Law does not say more, nor do the personal income tax regulations, so the core question on which the whole problem revolves is what is to be understood by "cost of acquisition satisfied" when the property is acquired for profit (inheritance or donation) where there is no price.

In my opinion, the answer must be given by making a joint interpretation with other precepts of the Personal Income Tax Law itself, specifically Article 36 relating to capital gains and losses, which indicates that "when the acquisition or transfer has been for profit, the rules of the previous article shall be applied (actual amount for which the property has been acquired plus improvements, expenses and taxes), taking as the actual amount of the respective values those resulting from the application of the rules of the Inheritance and Gift Tax, without them exceeding the market value".

And what is the value resulting from the application of the rules of the Inheritance and Gift Tax? The real value of the property.

In every inheritance or donation of a property, its valuation appears, in the part corresponding to the construction, which must serve as a basis for amortization if it is higher than the cadastral value.

It should be stressed that this legal discussion is going to be analysed by the Supreme Court, as it has recently issued an order dated 21st February 2020, admitting an appeal in cassation prepared by the State attorney, against the sentence issued on 30th May 2019 by the Valencian Community TSJ, a sentence in which the Valencian court established as doctrine the one we are defending here in this feedback.

In conclusion, the taxpayer on whom the burden of presenting his self-assessment weighs and on whom, if any, the harsh repression of the administrative penalty law falls if he is wrong, is the one who has to qualify and quantify the debt, so the Tax Office web page should enable him to quantify his return on real estate capital following the criterion of the High Court of Justice of the Valencian Community, a criterion which, in my humble opinion, is much more adjusted to law than the one followed by the Tax Administration in this matter.

You can see the article in Expansión

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