Автор: Николай Такиев

Income from renting out real estate is a common and traditional method of earning additional passive income.

Given the popularity of this topic, this article will cover the taxes owed on rental income, how and when to declare them, and important details to be aware of.

When individuals earn income, including from renting out real estate, they must comply with the provisions of the Personal Income Tax Act (PITA), which is the main legislative act regulating the taxation of individuals in Bulgaria.

Specifically, rental income from real estate is considered a private case of “income from rent or other paid use of rights or property,” covered by Articles 31 and 32 of the PITA.

The rules for taxing this income are the same regardless of the type of real estate rented out by individuals – apartments, houses, offices, shops, studios, or any other type of property.

ARE RENTAL INCOME FROM REAL ESTATE TAXED?

Rental income from real estate is considered taxable income and is therefore subject to a 10% tax.

A significant detail to note is that the individual owes tax on the rental amount received, which should be reduced by the so-called statutory deductible expenses, which for this type of income amount to 10%.

Statutory deductible expenses represent a fixed percentage set by the state, which we have the right to deduct from our income to determine the taxable amount.

Although called “expenses,” it’s important to know that these are not additional costs that need to be incurred or paid to the state.

In other words, the state determines the size of recognized expenses for maintaining the real estate through a fixed percentage, allowing us to reduce our income by this percentage and therefore pay tax only on the difference.

The logic behind the state’s determination of “statutory” expenses is to relieve individuals from the obligation to collect and prove actual expenses with documents, as is required for commercial companies.

Another advantage of “statutory deductible expenses” is that they always apply, regardless of whether any actual expenses related to the property were incurred during the year.

Example 1:

Gergana Petrova owns an apartment in central Sofia, which she rents out for 600 leva per month.

How is the monthly tax liability determined?

Applying the rule for statutory deductible expenses, we multiply the monthly rent by 10% statutory deductible expenses:

600 leva x 10% SDE = 60 leva

After determining the statutory deductible expenses, we subtract this amount from the monthly rent to get the taxable base (taxable income) on which to calculate the due tax.

600 leva – 60 leva = 540 leva taxable income

The taxable income is then multiplied by the tax rate, which is 10%, to determine the monthly tax liability.

540 leva x 10% tax rate = 54 leva tax liability

Considering statutory deductible expenses, we effectively owe tax on only 90% of the income received.

In other words, although the nominal tax rate is 10%, the effective rate, accounting for statutory deductible expenses, becomes 9% of the income received.

600 leva x 9% = 54 leva due tax

RENTING OUT A PROPERTY THAT IS MARITAL PROPERTY

Often, real estate rented out is jointly owned by both spouses.

In this case, although the rent is received by the family as a whole, each spouse, as a co-owner, owes tax proportional to their share of the property – half of the property.

Example 2:

If the above example is modified to include that the property is jointly owned by Gergana Petrova and Yordan Petrov, and each spouse owns 50% of the property, with a monthly rent of 600 leva, the situation would be as follows:

Gergana Petrova

600 leva x 50% = 300 leva (proportional income from the total rent)

300 leva x 9% = 27 leva due tax

Yordan Petrov

600 leva x 50% = 300 leva (proportional income from the total rent)

300 leva x 9% = 27 leva due tax

As illustrated, each spouse receives an equal share of the income and therefore an equal share of the tax liability.

The fact that the rent may be paid into a bank account of only one spouse does not affect the fact that each spouse owes tax.

HOW AND WHEN SHOULD THE TAX BE DECLARED?

Once the tax liability is determined, it must be declared and paid to the National Revenue Agency (NRA) within certain legal deadlines – quarterly and annually.

Tax declaration is done in two stages:

1. Advance quarterly declaration by submitting a Declaration under Article 55 of the PITA

According to the law, rental income tax must be declared and paid in advance quarterly, by the end of the month following the quarter for which the income relates.

• For rental income received in January, February, and March, the deadline for advance declaration and payment is April 30.
• For rental income received in April, May, and June, the deadline is July 31.
• For rental income received in July, August, and September, the deadline is October 31.
• For rental income received in October, November, and December, there is no obligation for advance declaration and payment as it will be paid together with the Annual Tax Return.

2. Annual declaration by submitting an Annual Tax Return under Article 50 of the PITA

All individuals who received rental income must declare this income by submitting an annual tax return by April 30 of the following year. In the same period, individuals must pay the tax. If the declaration is submitted and the tax is paid by March 31, a 5% discount on the tax is granted, up to a maximum of 500 leva.

The annual tax return must disclose the total amount of rental income received during the year and determine the total annual tax liability.

Advance paid tax throughout the year is deducted from the total annual tax, effectively paying only the difference, which includes the rental income for the last three months of the year.

It is important to note that if there was a period during the year when self-employment health insurance contributions were made, the law allows us to deduct these contributions from the taxable income before determining the annual tax liability.

Rental income is declared by completing Appendix No. 4 – income from rent or other paid use of rights or property to the Annual Tax Return.

WHO IS OBLIGED TO DECLARE AND PAY THE TAX?

A common mistake is the belief that the payer of the income always withholds and pays the tax. This understanding stems primarily from the example of employment income, where the employer withholds and pays the tax on our behalf monthly.

However, in the case of rental income, this rule does not always apply.

When rental income is received, regardless of whether it is from movable or immovable property, the responsibility to declare and pay the tax depends on the legal status of the parties. The following scenarios are common in practice:

1. WHEN THE RENTAL AGREEMENT IS BETWEEN TWO INDIVIDUALS

In this situation, the obligation to declare and pay the tax lies with the landlord – the person receiving the income.

It is important to clarify that in this scenario, the landlord must declare and pay the tax both in advance by submitting a Declaration under Article 55 of the PITA quarterly and annually by submitting an Annual Tax Return.

2. WHEN THE RENTAL AGREEMENT IS BETWEEN AN INDIVIDUAL AND A COMPANY

In this situation, the obligation to declare and pay the tax lies with the tenant company, which acts as the payer of the income.

In this case, when the company pays the rental income, it must withhold the tax and declare and pay it to the state on our behalf.

For the rental income paid, the company can issue us a certificate and a payment account.

However, it is important to note that we are still obliged to declare the received rental income by submitting an annual tax return.

For the last quarter of the year, we can choose the company not to withhold tax and instead declare and pay it ourselves through the annual tax return. This intention must be declared to the payer of the income in writing.

3. WHEN THE RENTAL AGREEMENT IS BETWEEN AN INDIVIDUAL AND A SELF-INSURED PERSON

When the agreement is with another individual, but that person is self-insured, such as a freelancer (lawyer, notary, accountant, architect, etc.), we must apply the same rules for declaration and taxation valid for the scenario with a landlord-company.

It is important to note that the obligation for withholding and declaring the tax by the self-insured person applies only when the agreement is signed in their capacity as a self-insured person, i.e., through their BULSTAT.

If an attorney who is self-insured signs a rental agreement for an apartment for personal living, they are not obligated to withhold and declare the tax on our behalf.

ARE SOCIAL CONTRIBUTIONS OWED ON RENTAL INCOME FROM REAL ESTATE?

A fundamental principle in social insurance is that contributions are owed by anyone engaged in labor activity.

Unlike taxes, where the criterion for owing tax is the presence of income, in social insurance, the criterion is whether labor activity is being performed for which contributions are due.

Rental income is passive income not related to performing labor activity. Therefore, no social security contributions are owed under the Social Security Code (SSC), and there is no obligation to register as self-insured persons.

However, if unemployed, regardless of registration with the Labor Bureau, it is important to know that monthly health insurance contributions must be paid.

As mentioned earlier in the article, when submitting the annual tax return, the law allows us to deduct health insurance contributions paid during the year from the taxable income.