Rental tax trap: How to ensure maximum advertising costs!

Rental tax trap: How to ensure maximum advertising costs!

Renting real estate to family members or close people requires careful structuring of the rental agreement in order to make optimal use of tax advantages. Particularly important is the aspect of “arm’s length” rental agreements, which must be adhered to so that the tax office recognizes the claimed business expenses. If the rental price is too low, taxpayers cannot deduct the full business expenses Ecovis reported.

In order to have the rental relationship recognized for tax purposes, the rental payments must actually be made and documented regularly. Taxpayers can deduct business expenses from rental income, which significantly reduces the tax burden. Deductible advertising costs include depreciation, modernization measures, repair and cleaning costs and loan interest. However, specific conditions come into play when calculating advertising costs.

The influence of the local rent

The amount of the rent must be at least 66% of the local rent in order to allow full deductions for business expenses. If the rent is between 50% and 66%, a total excess forecast is required to claim the full deduction. If this forecast turns out to be negative, only a proportionate deduction of business expenses is possible. If the rent is less than 50% of the local rent, only proportionate business expenses may be deducted and a total surplus forecast is not possible.

The usual local rent is determined based on the local rent index or by comparison with similar properties. Particular attention is also paid to the apportionable additional costs such as property tax, water supply and heating costs. In structurally weak areas, the amount of this information can further complicate cost-relevant information.

Special features when renting to relatives

The legal recognition of rental agreements between close relatives depends on their civil law effectiveness. In order to be able to claim tax advantages, these contracts must be structured in the way that would normally be between strangers. A discounted rental is not included in the arm's length comparison and is crucial for checking the intention to generate income, see above Haufe.

In particular, the regulation according to Section 21 Paragraph 2 EStG applies here, which regulates the provision of living space for partial payment. From the 2021 assessment period, special divisions between paid and unpaid parts are required, depending on whether the rent is less than 50% or between 50% and 66% of the usual local rent. As an example, one can consider the case of a taxpayer A who rents an apartment to his sister in 2024: With a basic rent of EUR 300 as well as an additional EUR 100 in contributions and a local rent of EUR 850, the rent to be paid with heating of EUR 400 is only 38.10% of the usual local rent with heating of EUR 1,050. Therefore, in this specific case, it is necessary to divide the income-related expenses, of which only 38.10% can be deducted.