Taxation of leasing agricultural land: an overview

This content is general information for educational purposes and does not replace the advice of a tax advisor. How the income from leasing a rural property is taxed depends on the owner's personal situation, the characteristics of the lease agreement and the regulations in force at any given time, so no article can give you a reliable figure for your specific case. This guide explains the concept and the variables that determine the tax treatment, not a calculation or a percentage.

Leasing agricultural land to a third party — for them to farm it, for grazing or another use — is a common option among owners who do not want to, or cannot, work the property themselves. The income received from that lease has its own tax treatment, different from what would apply if the owner worked the property directly, and also different from other taxes linked simply to owning the property, such as council property tax (IBI).

When an owner who is not carrying out an economic activity leases a rural property to a third party, the income received is generally treated as income from real estate capital for personal income tax (IRPF) purposes, in a similar way to how renting out a home would be taxed, although with certain particularities of its own for rural leases. This income is calculated by starting from the gross income received and deducting the expenses that the regulations allow, and the result is included in the owner's tax return together with the rest of their income.

Deductible expenses generally include items such as the property tax (IBI), interest on loans linked to its acquisition or improvement, maintenance and repair costs, or insurance taken out on the property, among others recognised by the regulations at any given time. The exact list of deductible expenses and their limits changes with the regulations, so it is worth confirming it with a tax advisor before calculating the net income from the lease, rather than assuming that all expenses related to the property are automatically deductible without further checks.

If, instead, the owner leases the property in the context of their own economic activity — for example, a business dedicated to managing rural leases, or a holder who combines leasing with another farming activity such that the whole is considered an economic activity —, the tax treatment may differ from that of simple income from real estate capital. It is a technical distinction that your advisor should confirm, because it changes both the calculation of the income and the associated formal obligations.

The specific terms of the rural lease agreement — duration, how the rent is paid (in money or in kind, something that remains relatively common in farming), how expenses are split between landlord and tenant, whether improvements are the responsibility of one party or the other — can have their own tax consequences that are worth reviewing with an advisor before signing. A well-drafted contract that clearly reflects these aspects later makes both the tax return and the resolution of any doubts that may arise with the tenant easier.

When the rent is agreed in kind — for example, a share of the harvest instead of a cash payment —, there are specific rules for valuing that income for tax purposes, since the tax authorities require a value to be declared even if no money was received directly. This is a situation in which it is especially advisable to seek the help of an advisor, because valuing income in kind is not always intuitive and a calculation error can have consequences for the owner's tax return.

A mixed lease — part in money and part in kind — is also possible, and in that case it is worth clearly documenting in the contract itself how the two forms of payment are split, so that it is later easier, both for the owner and their advisor, to separate and correctly value each component of the total income received in the tax year.

The Rural Leases Act, which regulates the civil aspects of this type of contract — minimum duration, renewal conditions and other aspects —, is different from the tax regulations that determine how the income received is taxed. Both sets of rules should be borne in mind when drafting the contract, and it is common for a lawyer or manager specialising in rural properties to review the civil aspects while a tax advisor deals with the tax treatment of the income.

Not confusing these two levels — civil and tax — is important because the obligations of each are independent: correctly complying with the Rural Leases Act in terms of duration or contract conditions does not by itself guarantee that the income is being correctly declared for tax purposes, and vice versa. Reviewing both aspects with the right professionals from the outset avoids discovering a problem on one of the two levels once it is harder to correct.

In addition to declaring the income received in their personal income tax return, an owner who leases a rural property may have other formal obligations, such as correctly identifying the tenant and the contract terms to the tax authorities if required, or applying, in certain cases, a withholding on the income if the tenant is a company or professional required to apply one. These obligations depend on the specific circumstances of each lease and should be confirmed with an advisor before starting to collect the rent.

If the owner is a person not resident in Spain, there are also specific rules for non-residents that may differ from those applicable to a resident owner, both in the calculation of the income and in the reporting obligations. This is a situation that is worth anticipating with an advisor experienced in non-resident taxation, especially because the deadlines and tax forms may differ from those usual for a tax resident in Spain.

Leasing a property does not exempt the owner from other tax obligations linked simply to owning the property, such as the IBI, which continues to be owed, unless otherwise agreed between the parties, by whoever is recorded as the owner on the date the tax accrues, as explained in the guide dedicated to that tax. It is common for the lease agreement itself to set out who bears this cost in practice, although the formal obligation to the local council remains with the owner.

If at some point the owner decides to stop leasing the property and work it themselves, or conversely, stops working it directly to start leasing it, that change of situation has its own tax effects that are worth anticipating with an advisor: moving from a regime of economic activity — explained in the guide on the tax regime for farming activity — to a regime of income from real estate capital, or vice versa, with different calculation rules and obligations in each case.

And if the owner decides to sell the property while it is leased, the existence of the lease agreement can be relevant both for the sale process itself — the buyer must be informed of the leasehold situation and any rights the tenant may have under the Rural Leases Act — and, in some respects, for the taxation of the transaction, which is explained in general terms in the guide on personal income tax when selling a rural property.

It is common, especially in the context of family farming businesses, for a property to be leased to a child, a sibling or another family member who continues the farming activity, sometimes for a reduced rent compared with what would be agreed with an unrelated third party. This type of lease between family members can have its own tax implications that are worth reviewing with an advisor, because tax regulations may require, in certain cases, valuing the transaction at market price for tax purposes even if the actual agreement between the parties is different.

This does not mean that leasing to a family member is inadvisable or that there is a problem with doing so: it is a common and legitimate practice, provided it is correctly documented and the owner is aware of the tax rules that may apply. An advisor can help structure this type of lease so that it is correctly reflected both for civil and tax purposes, avoiding future problems with the tax authorities if the transaction is reviewed.

If leasing to a family member is part of a broader plan for the future of the farming business — for example, as a preliminary step before a future transfer of the property to that same family member by inheritance or gift —, it is worth discussing this with the advisor from the outset, so that the taxation of the lease is coordinated with the tax planning for that future transfer, rather than treated as two completely independent decisions.

A common mistake is forgetting to declare the income from an informal lease, agreed verbally with a neighbour or acquaintance without a written contract, assuming that because there is no formal document there is no obligation to declare it. The tax obligation to declare the income received does not depend on there being a written contract, but on there actually being a rent paid in exchange for using the property; putting the contract in writing is, moreover, good practice that makes both the tax return and the protection of both parties in case of disagreement easier.

Another frequent mistake is deducting expenses that do not correspond to the period in which the lease income was generated, or that correspond to other parts of the property that are not leased, without keeping a clear record of which expenses are linked to which activity if the owner combines leasing part of the property with directly working another part. Keeping the income and expenses of each activity separate, even if they refer to the same property, makes the tax return much easier and reduces the risk of errors.

It is also common not to update the tax information when the lease conditions change — a contract renewal with new terms, a change in the payment method, the addition of a new tenant — assuming that the rules that applied to the previous contract are still valid without further checks. Every significant change to the contract is a good time to confirm with the advisor whether anything changes in the tax treatment of the income.

An owner with several properties or plots may lease them to different tenants, with different conditions and rents for each. In these cases, it is worth keeping an individualised record of each contract — income, expenses linked to each plot, start and renewal dates — because, even though the final result is included jointly in the owner's tax return, having the information organised by property greatly facilitates both the return itself and any future response to a tax authority query about a specific lease.

If some plots are leased and others are not, or if some are worked directly and others are leased, the owner may find themselves managing both income from real estate capital and income from economic activity within their own farming assets at the same time, each with its own rules. An advisor with an overall view of the whole estate, not just each lease separately, can help you correctly coordinate the declaration of all these items.

It is worth keeping the lease agreement, proof of each rent payment received — including, if applicable, the valuation of any rent paid in kind —, and proof of all the expenses to be deducted, such as IBI receipts, repair invoices or proof of interest on loans linked to the property. This documentation not only supports the annual personal income tax return, but may be needed if the tax authorities ever request evidence of any of these items.

It is also advisable to keep any relevant communication with the tenant about contract amendments, incidents on the property or verbal agreements that are later put in writing, because this documentation can be useful both for tax purposes and for resolving any future disagreement about the actual terms of the lease. An organised file, even a simple one, saves time and complications for both the owner and their advisor when it comes time to file the return.