SteuerGo FAQs

(2023) Rules for renting to relatives

Renting to family members at a reduced rate with its advantageous tax regulations offers the opportunity to claim losses from renting and leasing. These usually result from depreciation and interest on loans associated with reduced rent. If you comply with certain rules when renting to children, you can deduct the expenses in full as advertising costs while only taxing the lower rental income. This tax-saving model also works when renting to dependent children.

As of 1 January 2021, there is an important change:

• If the agreed rent is at least 66% of the local market rent, the expenses can be fully deducted as advertising costs.
• If the agreed rent is between 50% and 66% of the market rent, the intention to generate income must be checked, and a profit forecast is required:
• If the profit forecast is positive, the advertising costs can be fully deducted.
• If the profit forecast is negative, the advertising costs must be apportioned and can only be partially deducted.
• If the agreed rent is less than 50% of the local market rent, the use must be divided into a paid and an unpaid part. The expenses can only be deducted as advertising costs in proportion to the paid part.

Important: If the rent is at least 50% but less than 66% of the local rent, a total surplus forecast check must be carried out:

If this total surplus forecast check is positive, the intention to generate income is assumed for the provision of discounted housing, and the full deduction of advertising costs is possible.

If the total surplus forecast check is negative, the intention to generate income is only assumed for the part rented for a fee. For the part rented for a fee, the advertising costs can be partially deducted.

The total surplus forecast check for income from renting and leasing is carried out according to long-standing and established BFH case law. The BMF letter of 8 October 2004 (BStBl 2004 I p. 933) remains applicable.

Note: When renting furnished or partially furnished apartments, it may be necessary to include a surcharge for the furnishings to determine the local market rent. Such a furnishing surcharge must be considered if it can be determined from a local rent index or marketable surcharges, according to the Federal Fiscal Court ruling of 6 February 2018 (IX R 14/17). It is not permissible to determine it in any other way. In particular, it is not permissible to derive a furnishing surcharge from the monthly amount of the linear depreciation for the furniture and furnishings provided. Nor is it permissible to apply a percentage rental yield surcharge.

 

The 50% or 66% threshold applies only to the rental of apartments, not to commercially or professionally used premises.

 

Currently, the Federal Fiscal Court has ruled that renting at a reduced rate to a dependent child can also be recognised for tax purposes if it meets the so-called arm's length comparison. This means that the rental agreement has been legally agreed, and both its design and the actual implementation correspond to what is customary between strangers. This requires that the main obligations of the contracting parties have been clearly and unambiguously agreed and implemented accordingly, even when renting to relatives. "Strict requirements are placed on the proof of the seriousness of contractual arrangements between closely related persons" (BFH ruling of 16 February 2016, IX R 28/15).

In the case in question, the rental agreement with the child was not recognised because the daughter did not actually pay any rent. Instead, the parents offset the rent against the daughter's maintenance claim and only paid her the difference in cash. This is the provision of maintenance in kind in the form of living space. There was no reduction in assets for the daughter as a tenant and no increase in assets for the parents as landlords. Since there is no paid use, the rental relationship is not recognised, and the expenses or loss were not recognised as advertising costs.

Instead of providing the child with the apartment as maintenance in kind and offsetting the rent against the child's maintenance claim, it is more tax-efficient to pay the child cash maintenance, from which they can then pay their rent for the apartment.

Currently, the Federal Fiscal Court has ruled that when renting furnished or partially furnished apartments, a furnishing surcharge must generally be applied, as such rentals are regularly associated with an increased utility value, which is often reflected in a higher local rent. However, such a furnishing surcharge should only be considered if it can be determined from a local rent index or marketable surcharges. It is not permissible to determine it in any other way (BFH ruling of 6 February 2018, IX R 14/17).

Note: The local rent can generally be taken from the local rent index. But what applies if there is a comparable apartment in the same building that is rented to strangers and whose rent differs from the local rent index? Should this comparison rent be used for the 50% or 66% threshold check, or should the rent index still be used?

In October 2019, the Thuringia Finance Court ruled that for comparison with the local market rent, the rent demanded by the landlord from a third-party tenant using a comparable apartment in the same building should be used (ruling of 22 October 2019, 3 K 316/19). An appeal was lodged against the ruling at the Federal Fiscal Court. And indeed, the landlord was successful.

According to the highest financial judges: The local market rent for checking the 66% threshold should generally be determined based on the rent index. If a rent index cannot be used or is not available, the local market rent can be determined by an expert opinion, information from a rent database, or based on the fees for at least three comparable apartments (BFH ruling of 22 February 2021, IX R 7/20).

Note: According to the Baden-Württemberg Finance Court (ruling of 22 January 2021, 5 K 1938/19), a total surplus forecast is exceptionally required despite compliance with the 66% threshold if it involves renting a lavishly designed residential building, in this case, a single-family house with well over 250 sqm of living space. However, whether this view can be upheld must now be decided by the Federal Fiscal Court. The appeal is pending under ref. IX R 17/21.

At first glance, the view from Baden-Württemberg may seem hardly tenable, as the tax regulation is actually clear and was also clear in the past. Section 21 (2) sentence 2 EStG states: "If the fee for permanent rental of a flat is at least 66% of the local rent, the rental is considered to be for a fee." However, there is indeed case law from the BFH in the past where it held a similar view to the FG Baden-Württemberg or at least signalled that a total surplus forecast might be appropriate in exceptional cases (e.g. BFH ruling of 30 September 1997, IX R 80/94 and BFH ruling of 6 October 2004, IX R 30/03). The BFH advocates a total surplus forecast if the market rent - usually the rent according to the local rent index - does not reflect the "correct" rental value or if, exceptionally, special circumstances speak against the intention to generate a surplus.

However, the relevant BFH rulings are somewhat dated, and the BFH has recently advocated the general use of the rent index if one is available (BFH ruling of 22 February 2021, IX R 7/20). It will be interesting to see how the BFH will decide now.