(2021) Tax-saving model: rules for renting to relatives

Renting to relatives 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 a reduced rent. If you adhere to certain rules when renting to children, you can deduct the expenses in full as income-related expenses while only taxing the lower rental income. This 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 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 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 income-related expenses corresponding to the paid part.

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 withstands a so-called third-party 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 are clearly and unambiguously agreed and carried out 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 of the ruling, 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 and the rental relationship is not recognised, the expenses or loss were not recognised as income-related expenses.

 

The local rent can generally be found in 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 this comparative rent be used for checking the 50% or 66% threshold, or still the rent index?

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 22.10.2019, 3 K 316/19). An appeal was lodged with the Federal Fiscal Court against the ruling. And lo and behold: The landlord was successful.

According to the highest financial judges, the local market rent for checking the 66% threshold is generally to 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 rents for at least three comparable apartments (BFH ruling of 22.02.2021, IX R 7/20).