Over half the landlords in Spain are not paying taxes as the rental market expands, which is depriving the financially strapped government of revenue every year, claims the Gestha union of tax inspectors.

Despite an increase in rental properties nationwide, the country hasn’t seen an increase in tax revenue and the Gestha union of tax inspectors estimates that there is a shortfall of €2.5bn, as landlords are taking rent payments in cash to avoid paying tax.

According to Fernando Encinar, co-founder of Idealista, Gestha estimate that 54% of landlords are ducking taxes actually falls short of the true figures, which are set to grow further.

There has been a drop in house prices since Q2 2008 so many people who bought homes as investments are seeking tenants for their properties rather than selling them at a loss. At the same time, more Spaniards are trying to lease homes after they were priced out of the market in the years before the crash, making it easier for landlords to strike deals that don’t involve the taxman.

This is clearly illustrated as the number of properties for rent increased +18% to 2.2m in 2008, according to data from Spain’s Housing Ministry, whilst rental income declared by landlords rose by just +0.1% over the same period, a report by the Spanish tax office shows.

In 2008, a tax break was adopted that gives landlords a 100% tax break if they rent to tenants who are under 35, however as the majority of leaseholders are over 35, landlords are concerned that the break will be repealed in a couple of years, once they’re all registered with the state.

The penalty for avoiding tax on rent is a fine equivalent to 150% of the unpaid amount, according to the Spanish tax office, and the tax must be repaid.