The recent Supreme Court Judgment 5416/2025, of 20 November, has represented a significant interpretative shift in the taxation of the sale of properties leased by individuals, particularly with regard to the calculation of capital gains or losses for Personal Income Tax (PIT), as well as for Non-Residents (due to the reference made to the PIT regulations).

This ruling is especially relevant for taxpayers with rental properties in Mallorca and throughout the rest of Spain, and it requires a review of the criteria that the Spanish Tax Authorities has been applying in numerous tax audits and inspections.

The tax issue: depreciation and capital gains

When an individual transfers a property that has been rented out, Article 35 of the Personal Income Tax Law (LIRPF) provides that the capital gain or loss is calculated as the difference between the transfer value and the acquisition value.

The law establishes that the acquisition value must be reduced by the amount of tax-deductible depreciation, with the minimum depreciation being computed in all cases, even if it was not actually deducted as an expense.

Until now, the conflict arose in determining what should be understood as “minimum depreciation” when the property is not allocated to an economic activity and has generated real estate capital income, as the law does not provide any further definition of this concept.

The traditional position of the Spanish Tax Authorities

Until now, the Tax Administration had maintained that, in the case of properties rented out by non-business individuals, the minimum depreciation to be taken into account upon sale must always be 3% per year, calculated on the higher of the acquisition cost or the cadastral value (excluding land), even if the taxpayer had applied (or could have applied) a lower technical depreciation rate based on the actual useful life of the property.

This approach significantly increased the capital gain upon a future transfer and, consequently, the taxation under Personal Income Tax.

Supreme Court Judgment 5416/2025: the Supreme Court rules

The Supreme Court definitively clarifies this issue and clearly distinguishes between two different levels:

a) Depreciation as an expense (real estate capital income)

Within the scope of Article 23 LIRPF:

• The 3% acts as an automatic maximum limit for deductible depreciation.
• No proof of depreciation is required.
• It constitutes a legal presumption of effective depreciation.

b) Depreciation in the calculation of the capital gain

In the calculation of the capital gain or loss (Article 35 LIRPF):

• Minimum depreciation is mandatory, even if it was not deducted as an expense.
• However, it is not necessarily identified with the 3% rate.

The Supreme Court clearly states that:

the 3% rate does not constitute a mandatory minimum depreciation, but rather a maximum limit applicable when depreciation operates as a deductible expense, and that, in determining the acquisition value, a lower depreciation may be applied if it reflects the effective depreciation of the property.

Can depreciation lower than 3% be applied?

es, and this is the key point of the judgment.

According to the doctrine established, the taxpayer may apply depreciation below 3%, provided that it:

• reflects the actual useful life of the property,
• is based on reasonable technical criteria, and
• fits within the concept of minimum depreciation under Article 35 LIRPF.

To support this position, the Supreme Court expressly validates the use of the Ministerial Order of 27 March 1998 (depreciation tables), as well as the criteria of Corporate Income Tax, even if the property is not allocated to an economic activity.

The irrelevance of the landlord not being a business operator

One of the most relevant aspects of the analyzed judgment is that the Supreme Court rejects the idea that classifying the lease as real estate capital income prevents the application of technical depreciation criteria.

The Court recalls that the distinction between economic activity and real estate capital income under IRPF is essentially formal and does not alter the economic reality of the property’s depreciation.

Therefore, a technically correct depreciation cannot be denied solely because the taxpayer does not have a business structure.

Practical consequences for taxpayers

In our view, during the rental years, property depreciation usually generates limited tax savings under PIT, especially in the case of residential properties entitled to a reduction on net income (previously 60% and currently 50%).

However, at the time of transferring the property, the Tax Administration requires that the depreciation previously deducted be subtracted from the acquisition value. This results in a substantial increase in the capital gain and, consequently, in the taxation within the savings tax base.

This tax asymmetry has caused a limited tax benefit during the rental phase to translate into a significantly higher tax burden upon the sale of the property. It is precisely this effect that the Supreme Court corrects in Judgment 5416/2025, by clarifying that although minimum depreciation must always be taken into account, it is not mandatory to automatically apply the fixed 3% rate, and a lower rate reflecting the effective depreciation of the property may be used.

Conclusion

The Supreme Court judgment introduces a criterion that is more consistent with the economic and accounting reality of properties, correcting an excessively rigid interpretation by the Tax Administration that caused long-term detriment to taxpayers.

In particular:

• Minimum depreciation remains mandatory.
• But the 3% rate should not be applied automatically.
• A lower, well-substantiated depreciation is fully defensible.

Specifically, Supreme Court Judgment 5416/2025 has an immediate impact on:

• Sales of recently rented properties or future sales.
• Ongoing audit or inspection procedures.
• Requests for rectification of non-time-barred self-assessments.

For taxpayers with rental properties in Mallorca, this doctrine opens the door to a significant reduction in the PIT tax burden, provided that an appropriate technical analysis is carried out for each specific case and that specialized tax advice is obtained.

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