How to declare an investment property on your tax return

Investing in real estate assets is probably among the most challenging forms of investment, and for this very reason it is also considered among the most attractive.

Investing in real estate, in fact, requires a set of multidisciplinary skills and knowledge that make the real estate investor a committed figure capable of solving problems on multiple levels.

One of the levels on which the real estate investor is called upon to have knowledge and solve any critical issues is the tax level. The declaration of a real estate investment is not entirely straightforward; it has differences related to the type of property invested in.

Thanks to the digitization of investments, then, the real estate sector has also benefited with the emergence of real estate crowdfunding. This is a new way of investing in real estate that expands the frontiers and makes it easier to invest in real estate, but it needs to be fully understood in order to take full advantage of it. Also from a tax perspective.

In this guide structured in the form of questions and answers, therefore, we will provide you with a series of answers to the main questions related to how to declare an investment property when you file your tax return with the Internal Revenue Service. By the end of the reading you will have a clearer overview that will enable you to approach the field with greater awareness.

1. Check the documentation you need to declare real estate

When it comes time to file your personal tax return, some basic documents are a must. Namely:

• social security number;
• valid ID card (or passport);
• tax code of children/children and other dependents;
• tax code of spouse or civil union partner.

In addition to these basic documents, the following documentation must be prepared for the declaration of income from the ownership of real estate and land:

• cadastral survey;
• lease contracts;
• rent from leased property;
• copy of IMU payments made in the relevant year.

To which can be added the copy of the lease agreement, SIRIA form and Form 69 in the specific cases provided.

2. How to declare an investment property in the tax return?

Declaring investment property in the tax return is always mandatory, but the procedure to follow varies depending on the intended use of the property and its nature.

• Rental of a property: if you own a property used for rental purposes, the income from this activity must be declared in "Panel RB" of the "Income" individuals model called "Income from buildings and other data." In the case of subletting a property in Italy, "Framework RL" intended for "Miscellaneous income" of the 730 model or in the "Framework R" section of the Unico model is filled in. In the case of properties leased at an agreed rent, you can take advantage of the tax relief provided for this type of contract. In fact, law number 431/98 introduced the agreed, or conventioned, rent, which provides for a mandatory lease term of 3 years that can be extended by another 2 years. The law provides for a 30% reduction in the IRPEF tax base and registration tax.
• Sale of real estate: payment of capital gains on real estate is regulated by Articles 67 and 68 of the Income Tax Consolidation Act and is payable only in cases provided for in the regulations (e.g., resale of the property before 5 years after purchase). If this is the case, it is necessary to declare the capital gain or loss generated by the sale in "Schedule D" of the 730 model and, at "line D4", code "2" should be entered in column 1. Those who submit the Unico model will use "Schedule RL" of the "Income PF" model, entering the capital gain in "line RL6".
• Ownership of a non-rented property: if you own a property that is not rented out, you need to declare the ownership of the property in the land income section. So in the 730 model, "Box B" is used, and for the Unico/ Personal Income model, "Box RB" is filled in. In case the property is located abroad, it is necessary to declare it in the "Buildings abroad" section.
• Principal dwelling: if the property is used as a principal dwelling and coincides with the taxpayer's registered residence, you can take advantage of the tax deductions provided for this type of property (registration tax reduction, VAT, stamp duty exemptions, IRPEF deduction on the mortgage of 19%, under 36). The deduction is claimed by filling out the "Deductions" section of the 730 form or the "Schedule E" section of the Unico form.

Regarding the declaration of rental income generated by investment property, specifically, Legislative Decree Number 23 of 2011 establishes the option for the taxpayer to choose a substitute tax regime on rental income. This is the dry rent coupon, which applies to individuals who own real estate in lieu of IRPEF.

It goes without saying that the declaration of rental income follows a dual track that the taxpayer can choose according to his or her tax situation: IRPEF taxation of rented property; taxation of buildings with the dry coupon tax.

3. How do you declare real estate crowdfunding investment in your tax return?

Tax obligations related to real estate crowdfunding have not yet received a dedicated regulatory framework. So one has to refer to the existing tax framework that has instead regulated crowdfunding platforms with Law No. 205/17, which introduced the 26 percent withholding tax on equity crowdfunding.

To be eligible for the 26% regime, two conditions must be met:

1. be an individual resident in Italy who invests outside the exercise of a business activity;
2. the platform operator must be a registered intermediary, or must be a payment institution authorized by the Bank of Italy.

By meeting these conditions, you will not have to subject the gain to IRPEF taxation. The company in which you invested will levy a 26 percent tax on the return generated by the real estate transaction, that is, only on dividends and not on the invested capital. In this case, the company will act as a tax withholding agent and you will not have to declare anything on your tax return.

It is clear, therefore, that for the individual who invests in real estate through a crowdfunding platform, the tax return is greatly simplified compared to the case of the direct purchase of a property. Nor will he or she have to worry about how to include capital gains or losses in the tax return when investing through a real estate crowdfunding platform.

discover active projects

However, in the following chapter we will look at the specific cases in which it is necessary to declare capital gains or losses as a result of a real estate investment.

4. How to declare capital gains or losses on real estate investment

Capital gains on real estate investment resulting from the purchase of a building or real estate unit should be declared only in specific cases. These specific cases include the resale of the property within 5 years of purchase or if sold within 5 years of its construction.

The declaration of this type of capital gain has two paths.

1. The first route involves declaring miscellaneous income together with IRPEF. The amount to be paid is not fixed and will depend on the taxpayer's IRPEF tax bracket.
2. The second way involves paying a 26 percent substitute tax when signing the notarial deed of sale of the property.

However, Articles 67 and 68 of the Consolidated Income Tax Act (TUIR) provide guidance regarding the declaration of capital gains and losses accrued also as a result of the purchase of financial securities.

Financial securities may include shares in listed or unlisted real estate companies or builders, as well as shares held in a real estate fund.

The taxpayer is required to declare capital gains and losses of financial securities related to real estate values using Form 730 or the Individual Income Form.

• Capital gains are declared in "Schedule D" of the 730 model, and code "2" must be entered in column 1 under "line D4." Those who file the Unico model will use "Schedule RL" of the "Redditi PF" model, entering the capital gain in "line RL6."
• Capital losses can be posted as a deduction from capital gains of the same category of financial securities (e.g. real estate shares) and are declared in "Schedule RT" of the income model in column 5 of line rt94.

5. Investing with real estate crowdfunding is easier

Through our guide to declaring real estate investments in your tax return, you learned how complex it can be to manage the tax part of a physical property held in Italy or abroad.

And you have also discovered how much more immediate and simple it can be to invest in real estate through real estate crowdfunding.

In fact, when you you invest in real estate with crowdfunding platforms, you do not have to declare ownership of the property, since yours turns out to be a financial investment. A single, fixed tax rate of 26 percent applies to financial investments, which regulated platforms in Italy can also withhold at source, acting as a tax withholding agent.

A great advantage the latter since it frees you from the paperwork involved in declaring physical property held, reduces to zero the hours you have to spend figuring out how to declare any property held abroad and/or special cases. In no small part, it reduces the cost item related to the accountant.

In addition, real estate crowdfunding makes investing in real estate accessible to everyone, even those who cannot invest large assets. Real estate crowdfunding, then, offers a range of investment options and participation levels that can adapt to investors' different needs.

Ultimately, real estate crowdfunding makes investing in real estate accessible to everyone, simplifies bureaucracy and your tax return consistently.

DISCOVER REAL ESTATE PROJECTS