Ask a tax advisor on the topic of Income tax return

Advance succession: deductible costs for usufruct.

February 27, 2012 | 30,00 EUR | answered by Dipl.BW/SB Ulrich Stiller

In 2010, the residential property of my father, including all costs associated with the property, was transferred to me through advanced inheritance by notarial contract. In the transfer agreement (and land register), my father was granted a usufruct right for 2 of the three apartments - totaling approximately 75% of the living area. He privately resides in one of the apartments, and manages the other one as a holiday rental - apart from the advance payments for incidental expenses, no further payments are made. The third apartment is rented out, and the income from it belongs to me and covers the expenses in general.

Unfortunately, the tax office calculates differently: For 75% of the living area, no income is generated as it is provided rent-free, therefore 75% of the costs are not deductible. Ultimately, there remains a taxable income from the rent, which does not actually exist. Not being able to claim expenses is one thing. Having to pay taxes on income that does not exist is quite annoying.

The usufruct right should have allowed my father to continue benefiting from the property as a retirement provision despite the transfer - by living rent-free and supplementing his pension through the management of the other apartment.

I am therefore looking for a model that accurately reflects my actual costs and is accepted by the tax office accordingly. Specifically, I am wondering whether I can:

a) somehow claim the unrecognized 75% advertising costs of the property as special expenses. After all, they are ultimately real and my compensation for the advanced inheritance. Then everything would be okay.

or whether I have to:

b) create a completely new contractual situation (and can do so), for example by my father waiving the usufruct right, renting the apartments at a market price with a standard lease agreement, and in return, I promise him a monthly payment that allows him to do so. With the payment, he could also move out, and I could finance this payment by renting out the two apartments (since there is no usufruct right anymore).

However, I am not sure if this second option will be rejected due to abuse of design, and whether these payments will be accepted as a lasting obligation upon transferring the property (or if they are 100% deductible for me).

If this route ultimately proves feasible, I would also like to know if this support agreement is subject to strict rules that must be adhered to by the tax office (e.g. land register, changeability of the payment), or if such an agreement can also be made between us.

I would be very grateful for concrete suggestions!
Best regards!

Dipl.BW/SB Ulrich Stiller

Dear Client,

Thank you for your inquiry, which I would like to answer based on the information provided and in the context of your involvement in an initial consultation as follows:

Expenses related to rental income can only be deducted if income is generated.

In your case, your father transferred the residential building with 3 apartments to you subject to a usufruct reservation and also took over the expenses for the entire property. In addition, your father retained the usufruct for 2 apartments:

For the apartment occupied by the father himself, nothing can be deducted as there are no rental income.

If the father rents out the vacation apartment, as the usufructuary, he must pay taxes on the rental income but can deduct the proportionate advertising costs related to that apartment.

As the owner of the rented apartment, you must fully declare the income, but you cannot deduct advertising costs as these expenses are covered by the father as usufructuary according to the transfer agreement.

The tax consequences were not considered at all during the transfer.

The special deduction for you as requested does not exist.

The usufruct can be redeemed in the future, for example, for a one-time payment. This is a tax-free transfer of assets for your father as the usufructuary, and for you as the owner, it is considered acquisition costs. If you rent out as the sole owner without usufruct, you can deduct advertising costs again.

It may also be possible to redeem the usufruct for the future against recurring payments. The father would then have to pay taxes on the interest portion or the income portion in case of an annuity, while the present value represents acquisition costs for you. If you then rent out, you can again deduct advertising costs here.

In both scenarios, there will be no abuse of design if everything is structured correctly.

In your case, the usufruct agreement would need to be reviewed first. After that, a design measure for the future can be initiated.

I hope I was able to assist you.

Best regards,

Ulrich Stiller
Tax Advisor/Diploma in Business Administration