Iceland Rental Income Guide 2026

Rental income in Iceland is taxed as ordinary income at the progressive personal income tax rates (36.94–46.28%). Various deductions can significantly reduce the taxable amount.

Taxation of Rental Income

Net rental income (gross rent minus allowable expenses) is added to your other income and taxed at your marginal IIT rate. There is no separate flat rate for rental income.

Allowable Deductions

Mortgage interest on the rental property
Maintenance and repairs
Property management fees
Insurance premiums on the rental property
Depreciation on the building (not land)
Utilities paid by the landlord
Legal and professional fees

Depreciation

Residential rental buildings can be depreciated at 2% per annum on a straight-line basis. The depreciation is based on the construction cost (not the purchase price allocated to land).

Short-Term Rentals (Airbnb)

Short-term tourist rentals are subject to the same income tax rules. However, if you rent a room in your principal residence, a portion of the rental income may be tax-free under the rent-a-room relief (ISK ~100,000 per year exempt). Short-term rentals must also register for VAT if turnover exceeds ISK 2,000,000 in 12 months (11% reduced rate applies).

Losses

If expenses exceed rental income, the loss can be offset against other income in the same year. There are no passive loss limitation rules for rental property in Iceland.

CGT on Sale

When you sell a rental property, the gain is subject to 22% CGT. Depreciation recapture may apply. See the capital gains guide for details.