Spain’s Rental Housing Market: Foreigners Granted Tax Deductions

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Spain’s National Court has ruled that higher taxation for non-EU rental property owners is unlawful, writes Spanish Property Insight. From now on, they will be able to deduct maintenance expenses in the same way as EU citizens. At the same time, Spain’s overall rental policy is tightening, financial risks for investors are increasing, and yields are declining.

Income Tax

The rules for the Non-Resident Income Tax (IRNR) previously established a two-tier system. EU and EEA property owners could deduct expenses such as cleaning, utilities, repairs, or marketing when renting out homes, while investors from outside the Union were required to declare gross rental income without any deductions. On top of that, they paid a higher flat tax rate—24% compared to 19% for EU citizens.

The situation changed after the National Court (Audiencia Nacional) issued a ruling on July 28. It stressed that excluding non-European owners from deductions contradicts Article 63 of the Treaty on the Functioning of the EU, which guarantees the free movement of capital. The court also noted that Spain’s international obligations were being violated—particularly the tax treaty with the United States.

The case was triggered by a dispute with the tax authorities, who denied an American homeowner in Barcelona the right to deduct expenses. The decision was upheld by the Central Economic-Administrative Tribunal (TEAC). The National Court sided with the taxpayer, ruling that European Court of Justice case law must be fully applied in Spain.

The verdict continues a line of similar cases on inheritance and gift taxes, where discrimination against non-EU citizens was struck down by rulings of the European Court of Justice and Spain’s Supreme Court. That led to numerous successful claims for reimbursement of overpaid amounts. Now the door is open for similar claims in the field of rental income.

Rental Restrictions

The ruling could influence the initiative to impose an additional 100% tax on foreigners who buy property in Spain. However, it is unlikely to radically change the situation in the short-term rental market, which is facing increasingly strict regulation. As a result, Spain’s largest cities cut this segment, fines have risen into the hundreds of thousands of euros, and taxes and inflation have significantly reduced net returns. Even the officially declared yield of 4% is becoming difficult to achieve due to restrictions and risks.

Barcelona will phase out around 10,000 tourist rental licenses by 2028. Malaga has suspended new licenses for three years. Seville has introduced the practice of cutting off water supplies to properties rented without authorization. Last summer, almost 69,000 applications were filed for the national short-term rental registry, half of which were rejected. In spring 2025, the Supreme Court overturned restrictions in Valencia’s historic center, showing that local bans can be challenged, but for investors this only confirms the “regulatory swings”—rules change too quickly.

Additional Costs and Fines

Financial risks are also increasing due to potential fines. In the Balearics, illegal tourist rentals carry penalties from €40,000 to €400,000, and in Catalonia they can reach €600,000. In Barcelona, judgments against illegal apartment networks have run into millions. Another barrier is created by homeowners’ associations: since 2024, they can vote by majority to prohibit tourist rentals in their buildings, making the “buy in a residential block and rent short-term” model impossible without neighbors’ approval.

Buyers of new builds in Spain must also pay 10% VAT and the AJD stamp duty. In the secondary market, the ITP transfer tax ranges from 4% to 11.5% depending on the region. Rental income is taxed under IRNR: 19% for EU/EEA citizens and 24% for all others. A bill has been submitted to Congress proposing an increase of VAT on tourist rentals to 21% and the introduction of an additional tax for non-resident buyers. All of this could further increase the tax burden.

Other Risks

The macroeconomic situation is adding more pressure. According to INE, inflation reached 2.7% year-on-year in August. With rental yields at 4–5%, even this level eats up a significant part of real margins. Housing prices are rising faster: in Q2 2025, the index jumped by 12.7%—the highest in 18 years. However, transaction volumes have begun to decline, and stagnation is appearing in some regions. The closure of the “golden visa” program in April 2025 further complicated matters: demand from premium foreign buyers fell, and sales times for luxury properties increased.

Another threat for owners is the phenomenon of “squatting” (ocupación), where homes are occupied without the owner’s consent. Eviction proceedings drag on for months, and although special anti-squatting offices are being set up, the risk of downtime and costs remains.

As a result, Spain remains a large and liquid real estate market, but its rental segment is becoming increasingly challenging for investors. Local bans and moratoriums, rising fines, tax initiatives, and inflation make yields unstable. To preserve profits, investors are being forced to shift toward mid- and long-term rental formats, carefully verify licenses, and manage properties in strict compliance with regulations.