Residential rental contract: which one to choose and what you need to know
Residential rental contract: in this new article, we think it is useful to discuss rental contracts for long-term residential purposes, which may interest many of us – whether tenant or landlord, for personal or professional purposes – and in relation to which we have to consider some particularly important aspects.
Residential rentals with “free” or “agreed” fee
Rental contracts for long-term residential use are governed by Italian Law no. 431/1998. When drafting them, we have to comply with some mandatory requirements, first and foremost the duration, which may be for four years with tacit renewal for four more years on first expiry, or three years with renewal on first expiry for two more years.
One important aspect to consider is the combination between duration and rental fee: in fact, Law no. 431/1998 provides for the possibility for the Parties (landlord and tenant) to agree on
- a duration of 4 + 4 years, in this case with the possibility to freely define the rental fee
- a duration of 3 + 2 years, although in this case the rental fee must not exceed the amount defined locally by the trade union organizations representing landlords and tenants.
Substantially, the trade-off is between a longer duration (in practice, eight years, except in special cases) with a higher rental fee freely agreed between the Parties and a shorter duration (in practice, 5 years, except in special cases) with a lower rental fee bound to the local trade union agreements.
In the second case, moreover, we also have to consider the need for more detailed calculations (precisely to comply with the local trade union agreements between the aforementioned organizations) and the advantage of being able to access some tax concessions to reduce the taxation on the rental fee.
We should also remember that, in practice, the duration of the “4+4” contracts is eight years and that of the “3+2” contracts five, given that, on first expiry, the law does not permit the landlord to validly terminate the tenant’s lease, unless the specific conditions provided for in art. 3 of Law no. 431/1998 are effectively met.
Tax concessions for residential rental contracts with agreed fee
The first tax concession granted under Law no. 431/1998 for residential rental contracts with agreed fee in municipalities suffering from housing stress concerns a “further” reduction of taxable income of thirty percent, provided that this specific reduction is “added” to the “base” one (5 percent of the rental fee, without prejudice to higher percentages, recognized respectively in central Venice and the surrounding islands and buildings of historical/artistic interest, to which a reduction of 25 and 35 percent apply) that the Single Income Tax Act recognizes for all rental fees, whatever the type of contract applied.
A second major concession consists in the application of registration tax, where due, on an amount equal to seventy percent of the rental fee, with a reduction of thirty percent on the normal taxable value.
A further tax concession only for rental contracts with agreed fee concerns the home ownership tax (IMU), for which a reduction to 75% is recognized on the amount resulting from the application of the rate established annually by each municipality.
Written form, energy performance certificate and land registry conformity
Rental contracts must be formalized in writing in order to be valid, and must include an express statement in which “the tenant declares that they have received the information and documentation, including the certificate, relating to the energy performance” of the rented property.
It is not mandatory to annex a copy of the energy performance certificate to rental contracts concerning individual residential units. If in any case you decide to annex the certificate, a duty stamp is not required.
Close attention must be paid to ensure that this declaration is specified in the contract. If the declaration is omitted or the certificate not annexed, where due, the parties are jointly liable, in equal shares, to an administrative fine of between €3,000 and €18,000, reduced to between €1,000 and €4,000 for rental contracts relating to single residential units, and if the duration of the rental contract is no more than three years, reduced by half.
The Law assigns the Italian Revenue Agency the task of identifying, during registration (which – we recall – must be mandatorily requested no later than thirty days following either the date of signature of the rental contract or the date of contract commencement, whichever is the sooner, otherwise also in this case a fine will apply), any relevant violations for the purposes of the sanction proceedings and of sending them telematically to the competent region or autonomous province for verification and notification of the violation.
We should also remember that the rented property must have correct land registry data in order to correctly declare the land income and avoid fines due to failure to comply with the land registry laws.
Possibility to opt for the “flat tax rate”, but not for everyone
For over 10 years, there has been an optional alternative to the ordinary land income tax for income tax (IRPEF) purposes, in which the owner (or the tenant) renting a home for residential purposes (also along with appurtenances such as a garage, parking space or cellar) can opt for the “flat tax rate” system.
This decision lies with the landlord and assures considerable simplification and tax advantages also for the tenant. The ordinary rate of the “flat tax rate” is 21 percent, but if the rental is an agreed fee contract this is drastically reduced (currently it stands at 10 percent).
The flat tax rate absorbs the IRPEF tax as well as the relative municipal and regional taxes and the rental contract registration tax and duty stamp, both during first registration and any annual extensions, also in the case of termination of the rental contract.
Exercising this option does not however exempt from the registration of the rental contract. Moreover, in years following the first no ISTAT update can be applied, and due attention should be paid to this circumstance given the current inflation scenario.
Annual installments and balance payments of the flat tax rate must also be made.
It should however be considered that a somewhat questionable interpretation of the Italian Revenue Agency precludes the possibility to opt for the flat tax rate for all contracts in which at least one of the two parties is not a physical person.
In recent years, also the negotiation, formalization and management of rental contracts have become increasingly specialized activities, for which it is certainly appropriate, if not necessary, to resort to specialized operators who are able to safely guide both landlord and tenant, optimizing the legal and fiscal costs and benefits and at the same time protecting both parties from risks and fines, as well as meeting various other requirements.
Article by Stefano Baruzzi, Chartered accountant and legal auditor, real estate tax expert,
Head of Real Estate Contracts, Tax & Fiscal for Morning Capital Srl