(2021) Be cautious with reduced-rate rentals: Include furnishing surcharge!

In the case of reduced rent for relatives, expenses can be fully deducted as income-related expenses if the agreed rent is 50% (with profit forecast) or at least 66% (without profit forecast) of the local market rent (§ 21 para. 2 EStG). The local market rent can generally be found in the local rent index. When comparing the "agreed rent" and the "local market rent", the paid basic rent plus surcharges should be compared with the local achievable basic rent plus apportionable costs for comparable apartments in terms of type, location, and amenities. But what applies if an apartment is rented partially or fully furnished?

Current situation: 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 from surcharges achievable on the market. Determination in any other way is not permitted (BFH ruling of 06.02.2018, IX R 14/17).

The case: The couple rent an 80 sqm apartment to their son at a reduced rate, which is equipped with a new fitted kitchen. They also provide him with a washing machine and dryer for use. The tax office increases the local comparative rent by a furnishing surcharge for the fitted kitchen, washing machine, and dryer in the amount of the monthly depreciation, thus arriving at a remuneration ratio below 66%. Consequently, the claimed income-related expenses were reduced accordingly. The tax court also approved a furnishing surcharge and set it at the amount of the monthly depreciation plus a profit margin of 4%.

According to the BFH, the local rent index should be used to determine the furnishing surcharge and the local rent:

1. If the rent index, for example, provides for a percentage surcharge or an increase in the equipment factor through a points system for a provided fitted kitchen, this increase is to be regarded as market-standard.
2. If nothing can be found in the rent index, a furnishing surcharge achievable on the local rental market should be considered.
3. If a market-standard utility value for the provided furniture cannot be determined, a furnishing surcharge is not applicable. In this case, the local market rent without furnishings should be used.
4. NOTE: It is not permissible to derive a furnishing surcharge from the monthly amount of linear depreciation for the provided furniture and furnishings. The application of a percentage rental yield surcharge is also not permitted.

Tip: For furnished rentals, you should agree and specify basic rent, surcharges, and furnishing surcharge separately in the rental contract. Ensure that the amounts are sufficiently high to exceed the relevant threshold of 50% / 66%. If the "agreed rent" is at least 50% / 66% compared to the "local market rent", you can deduct the rental expenses 100% as income-related expenses. Use the above-mentioned instructions provided by the BFH in its new ruling to determine the furnishing surcharge.