Real Estate Investment Amortization: How to Calculate It Step by Step and Optimize Your Investment

Buying a property remains one of the safest ways to protect your assets. But for it to be truly profitable, you need to understand all the factors that affect its value over time. Key among them is the depreciation of real estate investments.

Knowing how it's calculated, what expenses you can deduct, and when it applies will help you optimize your profits, pay less tax, and make more strategic decisions. Below, we explain everything in detail.

What is real estate investment depreciation?

The amortization of a real estate investment is an accounting and tax process that consists of distributing the value of the property over its estimated useful life, thus reflecting its wear and tear or loss of value over time.

This concept is essential if you allocate your property to rent or to a economic activity, as it allows you to deduct this loss in value as an annual expense on your tax return. This means you can reduce your tax benefits thanks to a deduction that reflects the property's natural deterioration.

But it's not just a tax benefit. It's also a planning tool It helps you gain a clear view of the real value of your investment at each stage, making informed decisions and anticipating future reinvestments or renovations.

How is the amortization of real estate investments calculated?

In Spain, the most commonly used formula to calculate amortization is linear system, which consists of deducting the same percentage each year from the depreciable value of the property.

What part of the property can be amortized?

You must distinguish between two values:

• Land value: It is not amortized, since the land does not wear out.
  
• Construction value: Yes, it is amortized, because with use and the passage of time it loses value.
  

Criteria of the Tax Agency

According to Spanish tax regulations, you can apply a minimum amortization of 3% annually about the highest value between:

1. The acquisition cost of the property (not including the value of the land).
   
2. The cadastral value of the building (also excluding soil).
   

Formula to calculate annual amortization:

Annual amortization = Amortizable value × 3%

Practical example

Imagine you buy an apartment in Madrid for €220,000.
According to the land registry, 20% of the value corresponds to the land, that is, €44,000.

• Acquisition value: 220.000 €
  
• Land value: 44.000 €
  
• Depreciable value: €220,000 – €44,000 = €176,000
  
• Annual amortization: 176,000 € × 3% = 5.280 €
  

This amount is deductible each year as long as the property is rented or part of an economic activity.

Important: You cannot amortize more than 100% of the accumulated amortizable value. If you exceed this limit, you could face penalties or adjustments from the Treasury.

Do real estate investments always pay off?

No. Real estate investments are amortized only when they are used for an economic activity or generate income., as is the case with renting. If you use the property as your primary residence, you cannot apply any tax depreciation, although you could perform a theoretical calculation internally.

You can amortize if…

• Your property is rented, either for residential or tourist purposes.
  
• The property is part of your economic activity (for example, a commercial premises or office).
  
• Only part of the property is used professionally (for example, you work from home in a specific room).
  

You can't amortize if…

• You use the property as your habitual residence.
  
• It is a second home not rented.
  
• He is unemployed and does not generate income.
  

What happens if the use of the property changes?

If you decide to rent your primary residence, you can begin paying it off as soon as it's designated as a rental property. To do so, you'll need supporting documentation, such as a lease agreement or a published advertisement.

Key recommendations for correct amortization

1. Distinguishes between land and constructionTo avoid mistakes, check the property's cadastral value, which usually details this difference. You can also request an official appraisal.
   
2. Includes all expenses in the acquisition value: notary, taxes (such as ITP), registration, commissions, necessary renovations prior to leasing… All of these concepts are part of the amortizable value.
   
3. Keep all documentation: they may request it from you in the event of a tax audit.
   
4. Avoid exceeding 100% of the amortizable value: You cannot deduct more than the construction is actually worth.
   
5. Take amortization into account when selling the property: The more you have depreciated, the lower the remaining taxable value and the greater the capital gain subject to tax.
   

Buying a property in Spain: key tips for investors

If you're thinking about purchasing a property as an investment, we recommend considering how you'll amortize it from the outset. These tips can help you maximize your purchase:

1. Choose the location well

Prioritize areas with high rental demand: neighborhoods with good transport links, close to universities, tourist areas, or areas experiencing urban development. Higher demand means higher occupancy and lower risk.

2. Calculate the net profitability

Don't just limit yourself to the purchase price. Add up your annual expenses (property tax, community fees, insurance, maintenance, and amortization) and compare them to your rental income to truly understand how much you're earning each year.

3. Renovating can help you deduct more

If you make structural renovations that extend the property's useful life, those expenses may be added to the depreciable value.

4. Correctly declare your income

You can only apply the depreciation if you declare the rental or economic use of the property. A good tax advisor will help you optimize this aspect.

5. Have a long-term vision

Depreciation is especially useful if you hold the property for many years. As you depreciate, you also improve your estate and tax planning.

Request personalized advice

As you can see, understanding and correctly applying the amortization of real estate investments Not only does it allow you to pay less tax, but it also allows you to make more informed decisions about your investments. Not all situations are the same, so having the right advice can make a big difference.

In Luxus Real Estates We have a team of real estate investment experts who can help you calculate the most suitable amortization rate for your situation, select properties with high potential, and assist you throughout the entire purchasing and management process. Contact our real estate agents It is the first step to investing safely and profitably.