You can claim rent on your taxes

Renting to relatives: tricky special cases with tax savings and rental agreements

Those who rent to relatives should not only know the 66 percent clause in order to save taxes. We explain what needs to be observed in the rental agreement for dependent children or for furnished apartments and what else is important.

Renting to relatives: tricky special cases with tax savings and rental agreements
Renting to relatives: tricky special cases with tax savings and rental agreements

Buying a property and renting out the apartment or renting out the house is attractive for many, especially since the money is securely invested and taxes can be saved. The ancillary purchase costs such as notary and land charge, as well as interest on loans, house depreciation and renovation costs, are tax-deductible income-related expenses. Smaller purchases such as garden tools or current items such as electricity and sewage can also be deducted from taxes.

But be careful: if you want to deduct the full amount of your expenses for the rental property from your tax, you must also demand at least 66 percent of the market rent from relatives. If the rent is lower, for example only 50 percent of the local rate, only half of the interest, costs and depreciation can be deducted from tax.

Landlords should therefore always keep an eye on the local rent level. If this increases, the rent for the relatives should also be adjusted. Otherwise, the tax advantages will be correspondingly lower.

Discounted rental: Determine the local comparative rent

In order to know how much rent you can charge relatives, you should know the local rents. You can consult the rent index for this or hire an expert. If there is no rent index for the corresponding location, that of a neighboring municipality may also be used, according to the Federal Court of Justice.

Advantage for renting to relatives: The rent index also includes the rents of old contracts, which are usually well below the rents for new contracts. However, it remains to be judged whether the calculation of the 66 percent limit must be based on the upper or lower value of a rental range. It is clear, however, that the warm and not the cold rent is decisive.

This is regulated by a ruling by the Federal Fiscal Court: A man rented an apartment to his mother, for which he demanded a monthly rent of 2,900 euros. The tax office quickly found out that the rent was only around 62 percent of the local comparable rent and wanted the landlord to cut the tax savings. But he insisted that with the annual ancillary costs of 1,800 euros, a warm rent of 4,700 euros would be achieved, which he came to 80 percent. In the last instance, the Federal Fiscal Court gave the man right (Ref .: IX R 44/15).

Rent to dependent children

Students like to move into their parents' rented apartment and offset the rent with their maintenance. But the tax authorities take a closer look: if they do not find any rental-like account movements, they cancel the parents' tax advantages. Because even with your own children you have to sign a written rental agreement that corresponds to the usual conditions.

A case was heard in which their daughter's parents had rented out the apartment in their house. Although a rental agreement was signed and the rent was recorded in it, the daughter did not make any monthly transfers. When the tax office followed up, it was said that the daughter was paying the rent from her parents' cash maintenance. However, since she had no income of her own as a student, she actually covered her living expenses from the maintenance. The alleged offsetting of cash maintenance and rent could not be proven, so the Federal Fiscal Court agreed with the tax office.

From this it follows that the tax office only has to recognize family members' leases with children of legal age if they determine the amount of rent and maintenance and the amounts are paid separately and verifiably. This also applies if the offspring pays their rent from their parents' cash maintenance (BFH, Az. IX R 28/15 and BFH, Az. IX R 30/98).

If you want to avoid trouble with the tax authorities, you can use another alternative: If the children are given a higher amount of money (tax exemption up to 400,000 euros), they can use it to pay the rent. But be careful: Even then, the rent must not be paid annually or in a total amount for several years, but must be paid monthly so that the lease is recognized by the tax authorities (BFH judgment of 19.6.1991, BStBl 1992 II p. 75).

Renting furnished apartments to relatives

Be careful with furnished or partially furnished apartments: Here you have to state a furnishing surcharge, even if you rent to relatives. However, only if this surcharge can be determined from the local rent index or from surcharges that can be realized on the market - other sources are not permitted.

In a case negotiated before the Federal Fiscal Court, parents rented their son an apartment with a new built-in kitchen, washing machine and dryer and charged 66 percent of the local rent. But because the tax office increased the local comparative rent by a furnishing surcharge for the fitted kitchen, washing machine and dryer in the amount of the monthly depreciation, the 66 percent hurdle was undercut and the taxes claimed were reduced.

The BFH agreed with the tax office, because: Landlords may only apply the rent without furniture if the utility value for the furniture provided cannot be derived from the rent index, nor can a local rental market-based furniture surcharge be determined (BFH judgment of 6.2. 2018, IX R 14/17).

Tip: It is not permitted - even if the tax office sometimes disagrees - to derive a furniture surcharge from the monthly amount of the linear deduction for wear and tear on furniture or furnishings. This is also evident from the judgment mentioned above.

In order to avoid trouble and to keep the rental price low, it is better to let empty residential properties to relatives. If you want to be generous, you can of course give the relatives the equipment as a gift.