Investment Properties and Unpaid Rent: Italian Supreme Court Rules That Credit Losses Are Not Deductible

By judgment no. 26363 of 7 October 2026, the Italian Supreme Court (Corte di Cassazione) held that a real estate company may not deduct credit losses and provisions to the bad debt reserve relating to residential rents that were never collected, where they derive from investment properties and have already been subject to tax. The ruling deserves attention because the Court does not merely decide the dispute but sets out a principle of law intended to guide similar cases, defining in general terms how art. 90 and art. 26 of the Italian Income Tax Code (TUIR) are to be coordinated

The Facts of the Case

In 2011 a company had deducted losses and provisions relating to residential rents unpaid by tenants which, in the years in which they accrued, had been duly subject to tax. The appeal court had upheld the company’s argument that those losses concerned the receivables due from the tenants and not the properties themselves, whereas the Supreme Court sided with the Italian Revenue Agency.

The Supreme Court’s Decision

The starting point is the notion of investment property, namely a property that the company holds without using it in its business and without intending it for sale. For such assets, art. 90, para. 1, TUIR does not apply the criterion typical of business income, based on actual positive and negative components, but refers to the rules on property income, the same rules that apply to a private owner. In the case of a letting, the amount taxed is therefore the higher of the revalued cadastral income, reduced by a flat-rate 5%, and the rent, which may be reduced by up to 15% for documented ordinary maintenance expenses borne by the company. All other expenses and negative components are not deductible pursuant to the following para. 2.

On the latter provision the Court makes a first clarification, in line with previous rulings. The prohibition in para. 2 affects only those costs which the cadastral valuation tariff already takes into account on a flat-rate basis (art. 7 of Presidential Decree 604/1973), because its purpose is to prevent the same burden from reducing income twice. Since credit losses on unpaid rents do not fall within this category, the Supreme Court agrees on this point with the appeal court’s decision, which had excluded them from the scope of para. 2.

This does not, however, make the losses deductible, because the Court bases the prohibition on a different legal basis: art. 90, para. 1, read together with art. 26 TUIR. The reference in art. 90 to the rules on property income in fact covers all the provisions of Chapter II of Title I, and therefore also art. 26 which, although its heading refers to the attribution of income, in fact also affects the amount. In the version applicable to the dispute, that provision required residential rents to be included in income even if not collected, until the conclusion of the eviction validation proceedings for arrears, and recognised a tax credit of equal amount only for the taxes paid on the rents established in those proceedings. Allowing the deduction of the losses would therefore have made it possible to circumvent this mechanism, which is the only remedy provided for non-collection. For this reason the Court held that, “in order not to frustrate the aforesaid taxation”, credit losses and provisions to the bad debt reserve may not be deducted.

It should be noted, however, that the principle of law set out by the Supreme Court expressly refers to art. 26 in the version prior to Decree-Law 34/2019, and that the legal framework has changed for subsequent periods. Art. 3-quinquies of that decree, converted by Law 58/2019, provided that residential rents not received do not form part of income, provided that non-receipt is evidenced by a notice of eviction for arrears or by a payment injunction. The lessor therefore no longer has to wait for the validation proceedings to conclude. The provision originally applied only to contracts entered into from 1 January 2020, but art. 6-septies of Decree-Law 41/2021, converted by Law 69/2021, removed that limitation and extended its application to rents not received from that date, regardless of when the contract was entered into. By contrast, the tax credit for taxes already paid on rents that fell due and were not collected remains tied to the eviction validation.

The result is a regime that differs over time. For rents not received up to 2019, the solution adopted by the Court applies in full: the rents remain taxable until the validation, and recovery of the taxes is left solely to the tax credit. For rents not received from 2020, the judgment is silent, but the approach followed, which identifies art. 26 as the provision in which the legislator regulates the non-collection of residential rents, points to the exclusion of the deductibility of losses and write-downs under the new regime as well. In that case, what changes is the moment at which the rents leave the tax base, which coincides with the notice of eviction or the payment injunction.

Ultimately, the scope of the ruling is not limited to the case decided. In the principle of law set out, the Court states that, for investment properties, the non-collection of residential rents is governed exclusively by art. 26 TUIR, and not by the ordinary business income rules on credit losses and write-downs. This is a criterion for coordinating art. 90 and art. 26 that goes beyond the individual proceedings and remains relevant even after the 2019 amendments, because what changes is the instrument by which the lessor may exclude rents not received from income, not the rule that it is that provision, and not the general regime on receivables, that determines the tax treatment of non-collection.