Not all rent-to-own contracts are what they seem. Some, without warning, begin to be taxed as if the purchase had already been made. There are real estate transactions that, even though they are signed as rentals, are scrutinized by the tax authorities and treated as hidden financing.
In recent months, we have been seeing more real estate transactions structured as rent-to-own, especially when it comes to entire buildings or properties intended for economic activity. On paper, the formula seems convenient: you use the property, pay installments, and after a while, you buy it with a discount for what you have already paid.
The problem arises when the authorities consider that the purchase is certain from the outset. At that point, what appeared to be a rental begins to be taxed as something very different.
When the tax authorities say “this is not a rental”
The Directorate General of Taxes (DGT) has been clear in its binding consultation V1557-25:
If from the outset there is no reasonable doubt that the purchase option will be exercised, the contract is no longer considered an ordinary rental.
In these cases, what exists is a financing transaction, even if the contract is called something else. In other words, for the tax authorities, the property is already being purchased from the outset.
If the final price discounts all the installments and the purchase option is practically decided, the tax risk is high even if the contract says “lease.”
What happens in accounting terms (and why does it affect tax)?
When the transaction is classified as a finance lease, the company does not record a rental expense, but rather:
- An asset on its balance sheet (the building).
- A financial liability (the debt assumed).
The payments are no longer a “normal” expense and are broken down into two parts:
- Interest, which goes to income.
- Debt amortization, which is not a tax expense.
Continuing to account for the payments as rent when they are not can lead to adjustments, regularizations, and penalties.
Are the payments deductible over the five years?
Here is one of the most common mistakes. When the contract is considered financial:
- The full payment is not deducted.
- Only the following are tax deductible:
- Financial expenses, within their legal limits.
- Depreciation of the building, according to tax rules.
The rest do not reduce the tax, even if it is paid monthly.
Deducting full payments as rent when the transaction is financial may result in an audit and settlement with surcharges.
And when the purchase option is exercised, what happens?
From a tax point of view, the purchase was already underway. When exercising the option:
- No new depreciation begins.
- Depreciation of the already recognized building continues.
For commercial, administrative, or residential buildings, the usual reference is:
- Maximum straight-line depreciation of 2% per year, with a long horizon.
However, this is provided that:
- The building is correctly classified.
- The depreciation reflects real and justified depreciation.
Not all buildings are depreciated in the same way: land is not depreciated and some elements may require separate treatment.
What you should review before signing (or before proceeding)
These types of contracts cannot be improvised. Before signing—or even if it has already been signed—it is advisable to analyze:
- Whether the purchase option is truly optional.
- How the installments are allocated.
- What impact it has on the balance sheet.
- Whether the amortization is well planned.
- Whether the interest deduction complies with legal limits.
A poorly structured contract today can affect taxation for the next 20 or 30 years.
Not every lease with an option to purchase is a lease. When the purchase is almost certain from the outset, the tax authorities treat it as a financed acquisition, with immediate effects on accounting, corporate tax, and tax deductions. The good news is that, if properly planned, the impact can be managed. The bad news is that, if not reviewed in time, it can often be costly.
Before signing—or if you have already done so—it is a good idea to sit down, review the numbers, and plan. In this type of transaction, being late is often the real mistake.
For more information, consult our tax advisor.
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