Rental Income

When residential property is rented out for the tenant's residence or as home-sharing accommodation for tourists, the rental income is taxed as capital income, provided the relevant conditions are met.

This is an exception to the general rule that income from renting out property is taxed as business income.

Rental Income from Residential Lettings

For rental income from residential lettings to be taxed as capital income, the following conditions must be met:

• The property is residential accommodation covered by the Residential Lease Act.

• The lease agreement has been registered in the Housing and Construction Authority's lease register.

• No more than two residential properties are rented out.

A 25% tax-free allowance applies to this rental income. Capital income tax is therefore calculated on 75% of the rental income. The rental income must be reported with the annual tax return.

As a general rule, no expenses may be deducted from this rental income, except for the cost of heating and electricity, where these costs are included in the rent and this is stated in the registered lease agreement.

Deduction of Rent Paid from Rental Income

If you rent out a property that you previously lived in while paying rent for another property in which you now live, you may deduct the rent you pay from your rental income. To do so, you must report both the rental income and the rent you pay in your tax return.

The deduction cannot exceed the amount of the rental income, and any resulting loss cannot be claimed as a deduction.

Rental Income from Tourist Accommodation

For rental income from home-sharing accommodation for tourists (for example, Airbnb) to be taxed as capital income, the following conditions must be met:

• The rental qualifies as home-sharing accommodation under the Act on Restaurants, Accommodation and Entertainment.

• The home-sharing accommodation has been registered with the District Commissioner.

• The total rental income does not exceed 2,000,000 ISK per year.

No expenses may be deducted from rental income from home-sharing accommodation.

The rental income must be reported in in Section 3.7 (Capital Income) of the tax return.

If the total rental income exceeds 2,000,000 ISK during the income year, or if the registration of the home-sharing accommodation is revoked by the District Commissioner, all rental income for that year is taxed as business income.

If the property is jointly owned, the combined rental income of all owners must not exceed 2,000,000 ISK during the income year. If this threshold is exceeded, the rental income is taxed as business income for all owners.

Further Information

• Tax-free allowance for rental income from residential property: Article 66(3) of Act No. 90/2003 on Income Tax

• Home-sharing accommodation (taxation): Article 66(3) of Act No. 90/2003 on Income Tax

• Home-sharing accommodation (definition): Article 3 of Act No. 85/2007 on Restaurants, Accommodation and Entertainment, and Article 13 of Regulation No. 1277/2016

• Residential lettings (taxation): Article 66(3) of Act No. 90/2003 on Income Tax

• Offsetting rental income against rent paid (effective from 1 January 2018): Article 58(1)(a) of Act No. 90/2003 on Income Tax

• Act on Restaurants, Accommodation and Entertainment: Act No. 85/2007

• Taxable capital income: Article 7, Section C of Act No. 90/2003 on Income Tax

• Tax base for business or self-employment income: Article 61(3) of Act No. 90/2003 on Income Tax

• Rental of residential property, holiday homes and other property: Article 58 of Act No. 90/2003 on Income Tax