Allocation of real estate income based on legal ownership

The Directorate General of Taxes (DGT) has issued a relevant ruling regarding how income derived from property ownership must be declared when co-ownership exists. The central issue lies in determining whether it is possible to apply a distribution of profits different from that established by the legal ownership of the assets.

What the DGT has ruled

The query raised questioned the validity of establishing a difference between the percentage of participation in the property and the percentage of allocation of the profits obtained. After analyzing the regulations, the DGT has determined that real estate capital income is allocated to the taxpayers who hold the ownership of the assets, in accordance with the applicable rules of legal ownership.

In the specific case analyzed, as it involved co-ownership, the income must be allocated based on the ownership of each party, which in this instance corresponded to 50% for each co-owner. The administration emphasizes that this allocation is carried out regardless of any private agreement that the parties may have signed for the management of expenses or the assignment of profits between them.

What it means for you

This ruling has a direct impact on individuals who own real estate jointly. If you are a co-owner of an asset and have agreed with the other owners that profits be distributed in a manner different from the registered ownership proportion, you should know that, for Personal Income Tax (IRPF) purposes, the Administration will require the declaration to reflect the legal ownership.

Private agreements regarding how to manage costs or how to distribute income do not have effects against the Tax Administration regarding the allocation of real estate capital income. The regulations of Law 35/2006 and Law 58/2003 prevail over the contractual will of the co-owners in this area.

What you should do

Given this situation, it is necessary to evaluate the ownership structure of the properties that generate income. If there is a discrepancy between the economic reality desired by the owners and the legal ownership, the adequacy of the ownership should be considered to avoid inconsistencies in IRPF declarations. Each co-ownership situation must be analyzed to ensure that the allocation of income complies with what the DGT requires.