Interest on liabilities when purchasing
April 18, 2011 | 30,00 EUR | answered by Dipl.BW/SB Ulrich Stiller
We have transferred our two-family house (worth approximately 600,000 euros) with two roughly equal-sized apartments to our two daughters, each receiving half. In one apartment, we live with a registered right of residence in the land register, while the other apartment was renovated and is rented out after the transfer. The transfer was partially paid, meaning that the daughters took over the liabilities amounting to approximately 184,000 euros, were supposed to pay 200,000 euros (which we have now also gifted), and the rest was gifted. In the income tax return, we want to allocate all income and advertising costs to the rented apartment. The liabilities were taken out in general, not specifically related to the rented apartment.
Questions:
Can the daughters deduct the interest on the assumed liabilities in full or only partially related to the rented apartment in the income tax return?
Thank you.
Dear client,
Thank you for your inquiry, which I would like to answer based on the information provided and considering your involvement in an initial consultation as follows:
I assume in answering your question that the house is part of your personal assets and therefore not considered business assets.
Interest expenses are deductible as advertising costs whenever the reason for taking on the debt was:
1. to finance acquisition costs or production costs of the property
or
2. to finance maintenance expenses for the property
or
3. to finance other advertising costs related to the property.
For all 3 points, it is necessary that the property generates rental income.
From your information, I understand that the loan was used to finance the acquisition of the entire two-family house (point 1). Since only one apartment is rented out and the other apartment is used free of charge due to a right of residence, the criteria for generating rental income only apply to ONE apartment.
Therefore, only the portion of the interest expenses that applies to the rented apartment can be deducted as advertising costs. The interest expenses must therefore be allocated proportionately based on the living/usable areas.
I hope I was able to assist you.
Best regards,
Ulrich Stiller
Tax consultant/Diploma in Business Administration
