(2021) Rules for renting to relatives

Reduced rent for family members 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. The tax-saving model also works when renting to dependent children.

There is an important change from 01.01.2021:

• 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 divided 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 reduced rent 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 rented part. For the paid rented part, 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 dated 08.10.2004 (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 according to the Federal Fiscal Court's ruling of 06.02.2018 (IX R 14/17) if it can be determined from a local rent index or marketable surcharges. Determination in any other way is not permitted. 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 reduced rent can also be recognised for tax purposes for a dependent child if it withstands a so-called third-party comparison. This means that the rental contract has been agreed in a legally effective manner and both its design and the actual implementation of the agreement 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 related persons" (BFH ruling of 16.02.2016, IX R 28/15).

In the case in question, the rental contract with the child was not recognised because the daughter had not actually paid any rent. Instead, the parents offset the rent against the daughter's maintenance claim and paid her only 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 was no paid use, the rental relationship was not recognised, and the expenses or loss were not recognised as advertising costs.

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. Determination in any other way is not permitted (BFH ruling of 06.02.2018, 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 a third party and whose rent differs from the local rent index? Should the comparison rent be used for the 50% or 66% threshold check, or still the rent index?

In October 2019, the Thuringian Finance Court ruled that for the 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 22.10.2019, 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 22.02.2021, IX R 7/20).