Limassol named best European city to buy a second home for post-tax rental yield

According to new research by Cyprus-based Philippou Law Firm, Limassol ranks as the best European city to buy a second home, offering the highest post-tax rental yield.

The researchers analysed 50 major European cities to rank the best places to buy a second home based on rental yield after non-resident income tax. Each city was assessed on the estimated purchase price of a 60m² city-centre property, the gross yearly rental income it would generate, and the non-resident rental income tax an owner would pay in that city. Figures reflect modelled local income tax for an EU/EEA-resident owner; ownership costs, healthcare and social contributions, and tax in the owner's country of residence are excluded.

The 20 Best European Cities for Post-Tax Rental Yield

Limassol claims the top spot with a post-tax rental yield of 6.21%, matching its gross yield. A 60m² city-centre apartment costs an estimated €297,103, and because the resulting annual rental income of €18,450 falls entirely within Cyprus's personal income-tax allowance, no Cyprus income tax is payable.

Nicosia takes second place with a post-tax yield of 6.14%. It is also the most affordable city in the entire study for a 60m² property, at an estimated €165,804, and benefits from the same 0% effective tax rate as Limassol.

Iceland's capital Reykjavik ranks third, with a gross rental yield of 6.08%, and Iceland's rule of taxing 75% of qualifying residential rental income at 22% gives an effective rate of 16.5%.

Brussels places fourth at 5.39% post-tax, helped by an effective tax rate of just 8.6% under the model's assumptions, and Dublin rounds out the top five with a post-tax yield of 5.10%

Malaga stands out as having the highest gross rental yield of any city in the study, at 6.29%, but Spain's flat 19% non-resident tax rate means that it drops down to 5.09% once tax is factored in, meaning that it ranks sixth overall.

At the other end of the scale, Copenhagen and Amsterdam demonstrate how heavily tax can erode rental returns on a second home. Copenhagen's gross yield of 3.55% is reduced by Denmark's 42.1% effective tax rate, which is the highest for any city in the study, to 2.06% post-tax. Amsterdam's 4.96% gross yield is subject to the Netherlands' Box 3 rules, which tax a calculated return on assets rather than simply applying 36% to rent received.

Gregoris Philippou, Managing Partner at Philippou Law Firm, commented:

"Those looking to rent out a second home to serve as an additional source of income should take into consideration the country's tax rules, as much as the overall expected rental yield. Two cities can offer near-identical gross yields, yet the return an owner actually keeps can differ enormously once non-resident income tax is applied. We see this particularly with Malaga, which has the highest gross rental yield, but drops down the ranking once tax is accounted for.

"Cypriot cities perform well, given the personal income-tax allowance. This is due to the rental income falling outside the Cyprus income-tax net under the study assumptions, which is a significant advantage over higher-tax jurisdictions such as Denmark or the Netherlands.

"That said, prospective buyers shouldn't make a decision on rental yield alone. Purchase costs, ongoing property taxes, currency exposure and how rental income interacts with tax obligations in the owner's home country all need to be considered before buying abroad. Non-resident tax rules also change, so anyone weighing up a second home purchase should get up-to-date advice before committing."