The magic picture of rental income

Rental income comes under the microscope. The sharp increase in demand for short-term rentals, the bold adjustments to rents due to inflation – the Hellenic Statistical Authority has already recorded increases of more than 6.5% in the past year – but also the restoration of normalcy in the market after the pandemic should be reflected and with an increase in declared income. This is something that did not happen until last year.

AADE data records a strange stability in terms of the amount of rents. A total of 1.7 million individuals reported rental income that had not exceeded €7 billion for several years. What is striking is that 76 out of 100, or about 1.25 million owners, are limited to declaring less than 5,000 euros per year, or about 1,650 euros each on average.

The fact that almost 8 out of 10 advertise monthly rents between 120-150 euros per month clearly raises doubts. There are many reasons: “black incomes”, fragmentation of real estate and… forgotten rents in the rentals of the distant past or even the tactic of many large landlords to collect large rents through companies to avoid high tax rates (up to 45%) provided for in existing legislation. In the case of collecting rents from natural persons.

On the table is the creation of a more progressive tax measure.

On the table, the Ministry of Finance put forward several proposals that are under study:

• The framework for short-term rental contracts is subject to review as restrictions on the number of properties to be provided by natural persons and on the number of rental days are considered. The goal is to separate professional involvement with Airbnb and Booking-type rentals from simple exploitation of natural persons. Also to avoid limiting the properties available for long-term rentals, which leads to higher rents. However, the new law has been launched for electronic exchange of information with short-term rental platforms in order to obtain details of owners as well as collect rents. This measure has already been implemented in Greece for two years and has paid off. The deputy finance minister in charge said last week that revenues were expected to reach 600 million euros this year.

• The method of taxing rents. For rental income, a separate measure has been adopted stipulating a rate of 15% for income up to €12,000 per year (in practice, the vast majority of owners are taxed at this rate with only 150,000 declaring more than €10,000 each) and rates of 35% and 45%. % for income from 12,000 to 35,000 euros and from 35,000 euros and above, respectively. Various scenarios have been considered. One foresees the creation of a more progressive scale (considered distorted from 15% which is the minimum rate to go directly to 35% and 45% as this serves as a strong incentive for tax evasion) and the second, the inclusion and rents on the scale of natural persons as was the case in the past. In this case, those who have income from different sources (such as salary and rent or pension and rent) will be more burdened. For example, if someone earns €20,000 in wages and €5,000 in rent, they would currently be taxed at a rate of 15% on rental income. If €5,000 is included in the scale for natural persons, the rate from 15% will automatically jump to 28%. Those whose only source of income is rent will benefit from the inclusion of rents in the schedule of natural persons. This is because instead of being taxed at 15%, they will be taxed at 9%.

• Change in the method of paying rent. The possibility of paying rents through the bank was discussed for everyone. Today, compliance relates to professional leases as this is the only way professional expenses are recognised. Of course, this change alone does not “answer” the basic problem, which is including a lower rent in the contract compared to the actual rent, so that the difference is paid “in the black” and in advance. Those who resort to this practice run the risk of losing their money in the event of a dispute with the tenant as the courts award compensation based on what is written in the contract.

The scam of collecting rents from the company

Both natural and legal persons declare rental income. The €6.7 billion recorded in last year’s tax returns relates only to natural persons, not companies. Well, this number represents only a small portion of the actual amount tenants pay for residential and commercial leases. In order to get closer to reality, both the amounts paid for the tax identification numbers of legal entities and – of course – the “black” ones should be combined. The collection of rents by the company is a useful solution for those who receive large amounts of rent. The difference in tax rate is not the only reason. The company has the possibility of deducting costs related to maintaining or repairing the property from its taxable income. A natural person does not have such an option, as the only option recognized in the Personal Income Tax Law is a 5% deduction on rental income.

The dilemma of “company or natural person” has become apparent with great force, especially in cases of landlords who own a large number of properties to exploit mainly through short-term rental contracts. For example, approximately 40,000 owners (natural persons) who show an individual income of more than €20,000 are subject to tax at a higher rate than that applied to legal entities and to “net income”.
For an income of €50,000 from short-term rentals, which also includes expenses of €10,000 for cleaning, platform supplies, maintenance, etc., a tax of €15,475 is attributed to the name of the natural person (out of the €50,000, the owner is taxed in the amount of €47,500 due 5% deduction. Conversely, the same income with corresponding expenses would result in a tax of 8,800 euros if declared by the company. This is because the 22% tax would be calculated on the “income – expenses” difference, i.e. on the amount of 40,000 euros. Of course, To declare rental income in the name of a company, it must be owned by the company and the property respectively.

90% declare an amount up to 10,000 euros

The “self-employed” phenomenon is also reflected in rental income statements for tax returns. Just as freelancers strive to ensure that their net income does not exceed 10,000 euros in order not to escape the low rate of 9%, so the majority of landlords declare an annual rental income of less than 12,000 euros in order not to escape the 15% rate. Whether in 2020 returns (which were not affected by the pandemic as they recorded rental income) or in last year’s tax returns, the picture was similar: 76% of owners declared income up to €5,000 and 14%-15% declared income from €5,000 to €10,000. Only 7 out of 100 exceed the maximum of €10,000 (and even €20,000 per year). Well, over 90% of landlords in Greece are taxed at a rate of 15% on their rental income. This is achieved due to real circumstances (i.e. the vast majority of owners in Greece own properties of little value and therefore low income) but also through technical means. One way is to completely evade tax, and the second is to divide the property among related people, so that more people are guaranteed the right to be taxed at the low rate of 15%.