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Investing in housing is a common practice due to its high profitability and relative ease of management. However, a recurring doubt arises: is it better to buy as an individual or through a company? The answer depends entirely on your wealth situation and objectives.
Can an individual buy a property as an investment?
The answer is yes; you can invest in housing as an individual.
But from here, doubts may arise about whether it is better to buy as an individual or through a company, mainly considering how to save more or what is the safest way to make the transaction.
Is it better to invest as an individual or as a company?
As is often the case, it depends on the situation, as we shall see.
Buying a house as an individual. Primary residence and second home
Both the purchase of a primary residence and a second home are usually made by an individual, so it’s best to carry out these transactions as a private citizen. This is mainly due to the tax advantages available, as the purchase would be much more expensive if made by a company.
There are some taxes common to both individuals and companies, such as VAT and Property Transfer Tax (ITP). However, individuals will not have to pay Personal Income Tax (IRPF) on the purchase of a home for their own use, while for a company, this means charging a market rent to the partner, applying a 25% Corporate Income Tax rate.
Investing as an individual. Buying as an investment.
If a property is purchased for rent, the individual is taxed on the real estate income but benefits from exclusive tax advantages. Under the new Housing Law, the general deduction for new contracts is set at 50% of the net income.
However, this incentive can be higher: it reaches 60% if recent renovation work has been carried out and can go up to 90% if the property is in a “stressed zone” and the rent is reduced. These bonuses do not apply if the investment is made through a company.
Furthermore, rental income for individuals is included in the general income tax base and is taxed according to income. In the case of companies, it is taxed at 25%.
On the other hand, the income that companies obtain remains in the company and if the partner wants to benefit from it, they will have to pay taxes on it as dividends, paying the corresponding income tax bracket.
Buying a house through a company. Large fortunes
If we’re talking about large fortunes made up of many properties, the best option is to buy through a company.
A large estate is one that includes eight or more properties. In this case, it is more advantageous to buy a property through a company because a tax credit can be obtained for the management of the properties.
The deduction that companies can access is up to 85% of the rental income obtained, a figure that can reach up to 90% in cases where the tenants have a disability or if it is justified that in order to rent the property, renovations have had to be made.
The following requirements must be met:
- That the number of rental properties is eight or more.
- The lease must have a duration of more than three years.
Deductible expenses
The range of deductible expenses in corporate tax is wider than in the case of Personal Income Tax paid by individuals.
Both individuals and companies can deduct expenses directly related to the lease that cannot be passed on to the tenant, such as community fees, property tax (IBI), or mortgage interest and financing costs. For corporate income tax purposes, these expenses can be fully deducted, while for personal income tax (IRPF) purposes, the deduction will depend on the length of time the property is occupied.
Tax advisory expenses can be deducted in Corporation Tax, although this is not the case in Personal Income Tax.
Legal certainty
Unlike expenses, legal certainty is often greater when investing as an individual, especially due to the protection offered by the Urban Leasing Law (LAU). However, it is important to clarify that a company limits liability, protecting the partner’s personal assets from potential debts.
Despite this, there are many cases in which homes are purchased through companies, such as in inheritances, to avoid conflicts between beneficiaries; in these situations, it is better to manage company shares rather than undivided properties. Therefore, although there is generally a perception of greater security as a private citizen, it can also be advantageous to do so through a company in specific cases of asset protection or succession.
Conclusion
As we have seen, individuals can also invest in real estate. Depending on the circumstances, it may be more advantageous to do so as an individual or as a company. For primary and secondary residences, as well as when the portfolio consists of fewer than eight properties, it’s more beneficial to make the purchase through an individual. However, for large portfolios, it’s better to carry out the transaction through a company.
Do you need to optimize your investment strategy?
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