A first step towards taxing actual rents

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By requiring “professional” tenants to provide the tax man with information on their landlord, the government is taking a first step towards a tightened tax regime for real estate investors, writes Marion van der Donck. 

In Belgium, buy-to-let investments are considered to be relatively advantageous in terms of income tax.  Indeed, in principle the actual sums received in rent go untaxed. The tax authorities go by the index-corrected cadastral income of the property to establish the taxable base. This cadastral income (CI) is a notional (fictitious) income which is deemed to represent the rental income which owners earn from letting their properties. That being the case, most cadastral incomes are benchmarked in 1975 and are very far removed from reality, especially for old houses. Even though this (index-corrected) CI has been raised by 40%, taxation based on the CI remains considerably more rewarding to landlords than having the actual rents taxed.

“In Belgium, buy-to-let investments are considered to be relatively advantageous in terms of income tax”

This taxation regime (CI raised by 40%) applies to properties that are let as well as to unlet properties, such as second homes in the Ardennes or by the seaside. The cadastral income ‘à la Belge’ also applies to second homes abroad even though, in principle, this income is not taxed twice in Belgium. The income must be declared, but is exempt from tax subject to the application of applicable progressive tax bands provided Belgium has signed a Convention for the Avoidance of Double Taxation with the country concerned. Which means that this foreign CI (cadastral income from properties let abroad) pushes up the average tax rate of the other sources of income of the tax payers but is not directly taxed. 

Actual rents 

Nonetheless, in some cases, at the same time it is the taxation based on the actual rents that applies in Belgium. When the tenant uses the property for professional purposes (meaning a natural person carrying on his business activities or a company occupying the property), it is the gross rents actually received that need to be declared. Gross rents are understood to refer to the rent and the “rental benefits”, such as the maintenance and repair costs that have been paid by the tenant where they should have been defrayed by the landlord.

In both cases – cadastral income or rents actually received – the income is taxed via the tax return at the tax payer’s marginal rate, that is to say at his highest tax rate (a rate which soon runs up to 50%).

“It is worth pointing out that the interests over loans for a property are deductible”

But in the case of the taxation of the actual rents, the tax man allows deductions of 40% in flat rate costs from the taxable base. These costs are capped in consideration of the non-index-corrected cadastral income multiplied by a 5.37 revaluation coefficient (2023 income year, 2024 tax return). Declaring the actual maintenance costs is not possible. 

It is also worth pointing out that the interests over loans taken out to purchase or renovate a property, regardless of the amount and regardless of the kind of loan, are deductible from the entirety of the income derived from real property. Which means that contracting loan debts allows landlords to greatly reduce or even cancel out the taxation of the income derived from real property in their personal income tax.

Conversely, there is no getting away from the real estate tax, an annual tax that is payable by property owners. This tax is based on the cadastral income of the property. On average, the real estate tax amounts to around 40% of the amount of the CI. However, each region, each province and each municipality have the power to establish their own “local tax surcharges over and above the real estate tax”.

The hunt for actual rents

Given that taxation based on the actual rents is higher than taxation based on the cadastral income, the tax administration is looking to get its hands on income derived from real property which has not been properly declared. To do so, at its latest spending review, the government has decided to require the tenants who wish to deduct the rent they pay in order to carry on their professional business to fill in an attachment. In other words, to deduct rent as a business expense, they will need to provide the tax man with a set of details. These details will enable the tax administration to check whether the landlord is correctly declaring the rents actually received, rather than the cadastral income.

It also appears that in some cases, the landlord does not need to be informed of the fact that the tenant is using his property for professional purposes, even if the landlord has specified this is not allowed in the tenancy agreement. So he risks facing a tax reassessment. With the new obligation, this kind of situation should no longer occur.

Information

In which cases will tenants be required to include this attachment with their tax returns? In all situations where the tenant is a legal entity (companies, not-for-profit organisations liable for corporation tax or legal entity tax). For natural persons, the obligation exists if the taxpayer deducts all (or part) of his rent as an actual business expense.

In the attachment, the taxpayer will need to specify the landlord’s identity details, the address of the property, the amount of the annual rent paid and which he wishes to deduct as a business expense.

All the same, one of the points of the text bothers the Liberal party (MR). The text sets out that, where tenants deduct part of their living address as a business expense, but where part of the living address is used as private living quarters, the entirety of the rent is to be taxed as a business tax for the landlord, that is to say based on the rents actually received. The sole exception: if the parcelling into the business part and the private quarters has been expressly specified in the tenancy agreement, which is not always the case. This specification could therefore considerably drive up the tax burden on landlords in those cases where this parcelling has not been specified in the contract at the outset.

Tax reform

This “minor” new feature is in keeping with the intention of the Minister of Finance, Vincent Van Peteghem, to tax the actual rents instead of the cadastral income. This intention is part of an all-encompassing tax reform, to be progressively rolled out in several phases over several years. The first phase still leaves the rental incomes unaffected. It remains to be seen whether the other phases will see the light of day – and when – as this will be a job for the next government. 

“The taxation of the actual rents is an ever-recurring hot potato in the Belgian tax system”

The taxation of the actual rents is an ever-recurring hot potato in the Belgian tax system, but it is so politically sensitive and a source of major disagreement, that to date no government has dared to really tackle it. In his proposal, Vincent Van Peteghem announces the taxation of actual rental incomes at a rate of 25%, with a 30% deduction of flat rate costs. His proposal also allows for the actual expenses incurred, such as for renovation works, to be deducted which would obviously be an incentive for landlords to swiftly move towards renovating the housing stock. The tax reform plan also sets out a global exemption in the amount of 6,000 euros (interests, dividends and rental incomes) per year.