Tax-saving model: rules for renting to relatives
Renting at a reduced rate to family members, particularly children, offers tax advantages: Although the rent is below market level, all expenses can be deducted as income-related expenses under certain conditions. This model is particularly suitable when high depreciation and interest on loans meet lower rental income. The arrangement is also recognised for tax purposes for dependent children.
Current regulations for reduced-rate rental
Since 01.01.2021, there are three tiers:
- At least 66% of the local rent:
Income-related expenses are fully deductible – no forecast required.
- Between 50% and 66%:
A positive total surplus forecast is necessary to deduct all income-related expenses. If the forecast is negative, expenses must be partially reduced.
- Less than 50%:
The use is considered partially gratuitous. Income-related expenses are only partially deductible for the paid part.
Legal basis: § 21 para. 2 EStG
Arm's length comparison: Rental agreements with family members
Even when renting to dependent children, tax recognition is possible if the rental agreement withstands an arm's length comparison. This means:
- Legally validly concluded
- Clearly and unambiguously regulated
- Actually carried out as agreed
The BFH emphasises: “Strict requirements are placed on the proof of the seriousness of contractual arrangements between closely related persons”
(BFH ruling of 16.02.2016, IX R 28/15).
Example: If the rent is only offset against the maintenance claim and not actually paid, there is no paid rental relationship. In this case, the use of the apartment is considered maintenance in kind – income-related expenses are not deductible.
Tip: Pay cash maintenance and let the child transfer the rent themselves.
How is the local rent determined?
The basis is the local rent index. If there is a different rental for a comparable flat in the same building, the rent index still takes precedence. Only if no rent index is available or suitable can the local rent be determined alternatively – for example:
- through an expert report
- via rental databases
- or based on at least three comparable properties
BFH ruling of 22.02.2021, IX R 7/20
Generous properties: Total surplus forecast despite 66% limit
Even if the 66% limit is met, a total surplus forecast is mandatory when renting particularly large or elaborately designed properties.
Example:
Parents rent three villas (> 250 sqm) to their children. Losses of between 172.000 Euro and 216.000 Euro per year occur. The BFH does not recognise the losses – it is hobby as no intention to generate surplus was proven.
BFH ruling of 20.06.2023, IX R 17/21
Total surplus forecast for special properties
A 30-year forecast is required for:
- Living areas over 250 sqm
- Luxury fittings (e.g. swimming pool)
- High running costs
In similar cases, the BFH had already made it clear that the market rent for such properties does not reflect the actual living value. Therefore, it must also be checked whether the rental generates a surplus over the term (e.g. BFH rulings of 30.09.1997, IX R 80/94 and 06.10.2004, IX R 30/03).
Important:
The 66% rule only concerns objective remuneration.
The subjective intention to generate income can be additionally checked even if the limit is met.
Tax-saving model: rules for renting to relatives
Consider reduced rental rates and furnishing surcharge
When renting to relatives, advertising costs can be fully deducted if the agreed rent is at least 66% of the local market rent (§ 21 para. 2 EStG). If only between 50% and 66% is charged, a positive surplus forecast is required. The basis for the local rent is usually the local rent index.
If a flat is rented furnished or partly furnished, a furnishing surcharge must be applied – but only if this can be derived from the rent index or customary market surcharges. A flat-rate deduction from depreciation (AfA) or a percentage return surcharge is not permitted (BFH, judgement of 06.02.2018, IX R 14/17).
Example: Furnishing surcharge reduces remuneration rate
A couple rents a furnished flat to their son at a reduced rate. The tax office increases the comparative rent by a furnishing surcharge (for fitted kitchen, washing machine, dryer) and thus arrives at a remuneration rate of less than 66%. The result: advertising costs are proportionately reduced. The BFH confirmed that surcharges are permissible – but only with verifiable market practice.
BFH: Only verifiable furnishing surcharges permitted
- Rent index surcharges (e.g. for fitted kitchen) are permissible.
- If such information is missing from the rent index, local market prices must be used.
- If no surcharge can be determined, the rent without furnishing applies.
- AfA or return surcharges are not a permissible basis.
Tip: Specify furnishing surcharge separately in the rental contract – together with basic rent and surcharges. Only if at least 66% of the local rent is reached are all advertising costs deductible.
Comparative rent: Rent index or comparable rental in the building?
If the rent of a comparable, rented-out flat in the same building deviates from the rent index, the question arises as to which rent is the benchmark.
The BFH (judgement of 22.02.2021, IX R 7/20) decided: The rent index should be used as a priority. If this is not suitable or not available, the local rent can also be determined via an expert opinion, a rent database or at least three comparable flats.
Large and luxurious properties: Total surplus forecast required
For living areas over 250 sqm or particularly elaborate furnishings, a total surplus forecast is required even if the rent is over 66% (BFH, judgement of 20.06.2023, IX R 17/21).
Example: A couple rents three villas (each > 250 sqm) to their children and claims high losses. The BFH does not recognise these losses – the rental is classified as a hobby, as there was no intention to generate a surplus.
In earlier judgements (e.g. of 30.09.1997, IX R 80/94), the BFH had already emphasised: For exceptionally large or luxurious properties, a 30-year forecast is regularly necessary.
Important: The 66% rule only concerns the objective remuneration (§ 21 para. 2 sentence 2 EStG). The subjective intention to generate income can be examined separately despite compliance with this limit.
Consider reduced rental rates and furnishing surcharge
What do I need to know about rental income?
As a landlord, you must declare the basic rent as well as the service charges passed on to tenants as income. The costs incurred can be deducted as advertising costs for tax purposes.
Examples of rental income
Rental income includes, among other things:
- Rental income for flats or rooms
- Rental income for garages or parking spaces
- Service charges passed on to the tenant
- Rent for advertising spaces and vending machine sites
- Interest credits from building society contracts
- Compensation payments from tenants for early termination of the lease
- Leases for undeveloped land
- Income from a hereditary building right
Tax allowance for low rental income
If your annual rental income is less than 520 Euro, for example through subletting, you can omit this from your tax return. This income, which comes from temporary letting, is exempt from income tax. This also applies to the temporary subletting of parts of your own rented flat. In this case, however, no corresponding advertising costs can be deducted.
What do I need to know about rental income?
When is accommodation provided at a reduced rate?
If you have income from properties rented to relatives, these are subject to special income tax scrutiny. The tax office particularly checks whether the property was rented at a reduced rate. There is an important change from 1 January 2021:
- If the agreed rent is at least 66% of the local market rent, the expenses are fully deductible 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 are fully deductible.
- If the profit forecast is negative, the advertising costs must be apportioned and are only partially deductible.
- 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 are only deductible as advertising costs in proportion to the paid part.
Important: If the rent is at least 50 percent but less than 66 percent 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 reduced-rate 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 paid part. Advertising costs can be partially deducted for the paid part.
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 partly furnished flats, it may be necessary to include a surcharge for the furnishings to determine the local market rent. Such a furnishings surcharge must be considered according to the Federal Fiscal Court ruling of 6 February 2018 (IX R 14/17) if it can be determined from a local rent index or surcharges achievable on the market. Determination in any other way is not possible. In particular, it is not permissible to derive a furnishings 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% and 66% thresholds apply only to the rental of flats, not to commercially or freelance used premises.
When is accommodation provided at a reduced rate?
