Rules for renting to relatives
Those who rent a flat to close relatives, such as their own children, can benefit from tax advantages. The prerequisite is that the rental agreement is correctly structured and actually implemented.
Reduced rent: Tax advantages through income-related expenses
Even with a reduced rent, landlords can deduct income-related expenses (e.g. depreciation, interest on debt) for tax purposes. The following applies:
- Rent ≥ 66% of the local market rent: Income-related expenses are fully deductible.
- Rent between 50% and 66% of the local rent: A total surplus forecast is required:
- Forecast positive: full deduction of income-related expenses
- Forecast negative: income-related expenses only partially deductible
- Rent < 50% of the local rent: Rental is partially classified as gratuitous. Income-related expenses are only deductible in proportion to the paid rental share.
These rules only apply to the rental of residential property – not to rooms used for commercial or freelance purposes.
Total surplus forecast: When is it necessary?
A total surplus forecast must be carried out if:
- the rent is between 50% and 66% of the local rent
- or in exceptional cases also for rental at more than 66%, e.g. for elaborately designed or very large properties (over 250 m² living space)
The forecast checks whether a profit can be made from the rental within 30 years.
Arm's length comparison: Contract as with third parties
A rental agreement with relatives must withstand the same conditions as a contract with third parties:
- Contract in writing and clearly regulated
- Actual payment of rent
- Implementation as agreed
If, for example, the rent is offset against maintenance, there is no paid rental relationship – income-related expenses are then not deductible (BFH ruling of 16.02.2016, IX R 28/15).
Cash maintenance is better than maintenance in kind
If a flat is provided to the child as "maintenance in kind" (rent is offset against maintenance claim), this is not recognised for tax purposes.
Recommendation: Pay cash maintenance so that the child transfers the rent themselves.
Furnished flats: Consider furniture surcharge
For furnished or partly furnished flats, a surcharge on the local rent can be applied – but only if:
- this surcharge is included in the rent index or
- it is realistically achievable on the market
Not permitted: Surcharges based on depreciation or flat-rate percentage surcharges (BFH ruling of 06.02.2018, IX R 14/17).
How is the local rent determined?
The local rent is usually derived from the local rent index.
Alternatively (e.g. if there is no rent index):
- Expert opinion
- Information from rent database
- Comparison with at least three comparable flats
A single comparable rent in the same building is not sufficient if there is a valid rent index (BFH ruling of 22.02.2021, IX R 7/20).
Special case: Large or luxurious properties
For very large or high-quality flats (e.g. villas over 250 m², swimming pool), a total surplus forecast may be required despite compliance with the 66% limit (BFH ruling of 20.06.2023, IX R 17/21).
- Case study:
Parents rent three villas to their children, each with > 250 m² living space.
The rental leads to high losses, which are to be offset against other income.
→ Not allowed, as there is no intention to generate income.
- Reason:
The market rent often does not realistically reflect the special residential value of such properties.
Long-term loss-making activity indicates hobby – losses are not deductible for tax purposes.
Rules for renting to relatives
Reduced-rate rental: Comparative calculation with apportionable service charges
Flats are often rented to relatives at a price below the local market rate. Such discounted rentals are advantageous for tax purposes because, on the one hand, only lower rental income needs to be taxed and, on the other hand, expenses can be fully deducted as income-related expenses.
There was an important change on 1 January 2021:
- If the agreed rent is at least 66% of the local market rent, the expenses can be fully deducted as income-related expenses.
- 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 income-related expenses can be fully deducted.
- If the profit forecast is negative, the income-related expenses 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. Expenses can only be deducted as income-related expenses in proportion to the paid part.
The Federal Fiscal Court has clarified that for the comparison calculation, "local rent" means the gross rent or warm rent. Consequently, the costs that may be passed on according to the Operating Costs Ordinance must be added to the comparable cold rent (BFH ruling of 10 May 2016, IX R 44/15).
The "local market rent" includes the cold rent plus the apportionable costs for flats of comparable type, location, and equipment.
The costs apportionable according to the Operating Costs Ordinance include, in particular, property tax, costs for water and sewage, heating, street cleaning and waste disposal, lighting, garden maintenance, chimney cleaning, property and liability insurance, and for the caretaker (§ 2 BetrKV). Maintenance and repair costs are not included according to § 1 BetrKV. Therefore, the warm rent paid is compared with the local warm rent (see also R 21.3 EStR).
The calculation method with warm rents is more advantageous for landlords than the calculation with cold rents, as it includes operating costs. These costs represent a significant part that the tenant usually fully bears even in the case of discounted rental.
Current decisions
The Federal Fiscal Court recently ruled that when renting furnished or partially furnished flats, a furniture surcharge is generally to be taken into account. Such rentals often come with increased utility, which is often reflected in higher local rents. However, such a furniture surcharge is only acceptable if it can be derived from a local rent index or realisable market surcharges. Other methods of determination are not permitted (BFH ruling of 6 February 2018, IX R 14/17).
Regarding the examination of the 50 or 66 percent threshold for the local rent, there is the question of whether to refer to the local rent index or the rent of a comparable, externally rented flat in the same building. The Thuringian Finance Court decided in October 2019 that the rent of a comparable externally rented flat in the same building should be used (ruling of 22 October 2019, 3 K 316/19). However, this ruling was appealed before the Federal Fiscal Court, and the landlord was successful.
The highest financial judges clarified that the local market rent for checking the 66 percent threshold should generally be determined based on the rent index. If no rent index is available or does not exist, the local market rent can be determined by expert opinions, information from a rent database, or by the comparative rents of at least three similar flats (BFH ruling of 22 February 2021, IX R 7/20).
Reduced-rate rental: Comparative calculation with apportionable service charges
What should be considered for short-term rentals (e.g. Airbnb)?
If you rent out your flat or house on a short-term basis, for example to earn extra money through platforms like Airbnb, you must pay tax on the rental income. This applies even if you only sublet occasionally or for a short period.
However, there are ways to reduce your tax burden. You can present all advertising costs incurred in connection with the rental to the tax office. You can deduct these from the rental income you have earned, thus reducing your taxes.
Deductible advertising costs include, among others:
- Proportional rent or interest for the rental period: If you rent out a room in your flat, you can claim part of your rental costs as advertising costs.
- Proportional renovation and maintenance costs: If you carried out renovation work or repairs before renting, you can claim these as advertising costs. Ongoing maintenance costs, such as heating system maintenance, can also be deducted.
- Proportional utility costs for the rented space, such as heating, water, gas: If you rent out a room in your flat, you can deduct part of the utility costs as advertising costs. You should allocate the total costs of your utility bill accordingly.
- Payments to Airbnb: You can also deduct the costs you pay for using the Airbnb platform as advertising costs.
- It is important to collect all receipts and invoices related to the rental. This is the only way to prove which costs you actually incurred and claim them as advertising costs.
To ensure you comply with all tax aspects of short-term rentals, you should consult a tax advisor. This way, you can ensure that you do not overlook any important points and avoid unexpected tax back payments.
What should be considered for short-term rentals (e.g. Airbnb)?
What is an energy performance certificate and what costs are involved?
The energy performance certificate is a document that assesses the energy requirements of a building. There are 2 types of energy performance certificates: the requirement-based certificate and the consumption-based certificate. The requirement-based certificate considers the building's energy needs, while the consumption-based certificate analyses the actual energy consumption of recent years. Energy performance certificates are valid for ten years from the date of issue.
As a landlord of a residential building in Germany, you are legally obliged to provide an energy performance certificate for your property. The certificate provides information about the building's energy requirements and serves as a guide for tenants and buyers. However, there are costs associated with obtaining the energy performance certificate, which can affect landlords.
The costs for obtaining an energy performance certificate depend on various factors, such as the size of the building, the type of certificate, and the effort required by the energy consultant. Generally, the expenses range from 150 to 600 Euro.
Deduct energy performance certificate as income-related expenses for landlords
As a landlord, you can declare the costs for obtaining an energy performance certificate as income-related expenses in your tax return. This applies regardless of whether you obtain the certificate due to a legal obligation or voluntarily. The costs can be claimed as income-related expenses under rental income.
The costs for the energy performance certificate are immediately deductible income-related expenses. It is advisable to keep the invoice for obtaining the certificate to present it in the event of a tax office review.
What is an energy performance certificate and what costs are involved?
What costs can landlords deduct for tax purposes during a vacancy?
Anyone renting out property in Germany must not only manage the rental, tenant selection, and support but also be prepared for vacancies. If a flat or house is vacant for a certain period, it can lead to financial losses. But what options are there to deduct expenses for temporary vacancies for tax purposes?
What are expenses for temporary vacancies?
Expenses for temporary vacancies include all costs incurred in connection with renting out property but cannot be covered by rental income due to vacancies. These include costs for maintenance and repairs, advertising, energy costs, property tax, and waste disposal fees. However, the vacancy must actually be temporary, meaning there must be a realistic chance that the flat or house will be rented out again.
Tax deductibility of expenses for temporary vacancies
Expenses for temporary vacancies can be deducted for tax purposes, but certain conditions must be met. Firstly, the costs may only arise if the property is rented out and no income is generated. Secondly, the costs must be necessary and reasonable, i.e., no luxury renovations or unnecessary maintenance work should be carried out.
The deductible expenses are claimed as income-related expenses under income from renting and leasing. They must be stated in the tax return for the respective year. When calculating income tax, they are then deducted from the rental income.
Overall, expenses for temporary vacancies can be deducted for tax purposes if they are necessary, reasonable, and actually incurred. However, landlords should ensure that the vacancy is indeed temporary and that there are realistic prospects of renting it out. If landlords have any uncertainties or questions about tax deductibility, they should consult a tax advisor.
What costs can landlords deduct for tax purposes during a vacancy?
What applies to rental income from abroad?
As a rule, the foreign state in which the property is located has the right to tax the income from renting and leasing (taxation in the state of receipt). The foreign rental income is then tax-free in Germany but subject to the progression clause.
However, if the rental property is in an EU/EEA country, the rental income is not subject to the progression clause. Rental income from the EU/EEA does not need to be declared in the income tax return.
However, losses from renting out a foreign property in the EU/EEA cannot be claimed in the German tax return, even if they are not taken into account for tax purposes abroad (FG Baden-Württemberg, 08.07.2014, 4 K 1134/12).
Note: An important exception applies to properties in Spain. Rental income must be declared in Germany in the "V" form. The income tax paid in Spain on the rental income can be credited against German income tax.
Rental income from third countries (non-EU/EEA countries) is fully subject to the progression clause in Germany and must be declared in the AUS form. The foreign income must then be determined according to German tax regulations.
Be careful: Some double taxation agreements (e.g. with Switzerland) provide for the so-called credit method. In this case, the foreign rental income must be declared in the "V" form. The income tax paid abroad on the rental income can be credited against German income tax.
Therefore, each individual case of foreign property must be carefully examined to determine which state has the right to tax, whether the exemption or credit method applies, and whether the progression clause applies.
What applies to rental income from abroad?
