Rent rebate? Tax office cuts with!
Background
Anyone who rents out real estate can generally deduct all income-related expenses, i.e. costs relating to the property, from their taxes. This also applies if losses are incurred in individual years, for example due to renovations or vacancy. The tax office assumes an intention to generate income, i.e. the intention to generate a surplus over the entire rental period.
But be careful: If you rent well below the local market level, this assumption can be overturned and this can cost you tax benefits!
When is the intention to generate income at risk?
This check is particularly relevant if the rent is significantly lower than the local comparative rent, for example when renting to family members. The tax office does not look at your motives, but only at the figures.
This is how a distinction is made:
- Rent from 66% of the local comparative rent: No problem – you are renting for a fee. All income-related expenses remain deductible.
- Rent between 50 % and 66 % of the local comparative rent: Now you’re in a gray area. The tax office requires a forecast calculation: can you make a profit over the
entire useful life despite the reduced rent? You can only deduct all costs if this forecast is positive. If it is negative, the tax office will reduce the deduction of income-related expenses. - Rent below 50 % of the local comparative rent: This automatically constitutes partial remuneration. This means that the rental is divided into a paid and a free part. The deduction of income-related expenses is then reduced proportionately, depending on the percentage of the market rent you charge.
Example from practice
Let’s assume you rent an apartment to your brother for €600 per month. The rent index for your city states an average rent of € 1,000 for comparable apartments. This is 60% of the local rent – so you are in the intermediate zone (50-66%). In this case, the tax office requires a forecast calculation: Will the rental income be sufficient in the long term to cover all costs and generate a surplus? Only if you can demonstrate this plausibly will all income-related expenses remain fully deductible.
What counts as “local comparative rent”?
- Rent index for your city or region
- Expert opinion
- Comparable rents for similar apartments in your area
You should document these values carefully in order to be prepared for an audit by the tax office.
Recommendation for action
- Check your rent regularly – especially when renting to relatives.
- Make sure that you do not fall below the 66% mark of the usual local rent in order to secure the full deduction of income-related expenses.
- If your rent is lower than this, prepare a forecast calculation at an early stage to prove your intention to generate income.
- Document the comparison to the local rent properly – rent index, expert opinions or comparable properties are your best friend here.
Are you unsure whether you can get the full deduction for income-related expenses for your property?
Get support from PepperPapers – we’ll put your rental through its paces for tax purposes!
