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Questions regarding the overall tax treatment of the construct

August 16, 2015 | 80,00 EUR | answered by Ralph J. Schnaars

Tax-wise feasible?

Parents own a single-family house in City A, which is to become a second residence as the father works here. The main residence will be City B in a granny flat within the daughter's house, rented out to the parents at 72% of the local rent, with a rental agreement, utility bill settlement, separate entrance, and all the bells and whistles. The daughter lives here with her grandchild, and the mother, after an illness, has her main place of residence here, so the father also spends his leisure time here. Distance is 230km one way.

In the house in City A, there are also two adult sons who want to financially support the parents with a total of €900 per month (since they live rent-free), presumably for 5 years as long as the mortgage payments for the house are still ongoing. Without this support, the house in City A would not be financially sustainable with the father's salary alone.

Tax-relevant points:
- Daughter deducts proportionate advertising costs and depreciation on her house in City B against the rental income from the parents
- Father deducts double household expenses
- Monthly €900 gifts from the brothers in City B to the parents over 5 years

Question: Is the entire structure tax deductible, or will the double household expenses or the discounted rental to relatives not be accepted, since the parents could not afford it without the monthly gifts from the brothers?

The gifts from the brothers should be tax-free, as each child has a gift tax exemption of €20,000 per parent every 10 years, totaling €80,000, which is below the limit, right? Do these monthly gifts need to be reported somewhere, or is a simple transfer with the subject line "gift" sufficient? Could the tax office claim that this is rental income to be taxed, even though they are living in the children's rooms without a separate kitchen or entrance?

An alternative to the gifts would actually be renting out the rooms to the brothers against proportionate advertising costs. But what happens after 5 years, when the parents no longer need the support? Can they simply stop renting out, even though they have been deducting advertising costs proportionately for 5 years?

Thank you for your effort.

Ralph J. Schnaars

Dear inquirer,

Your scenario is conceivable. That is the good news at the beginning.

However, the payments made by the brothers are likely not gifts in the eyes of the tax office, but rather cost sharing for the living situation in A.

Therefore, the text of the transfers should probably not state "gift", but rather "support", as it seems to be more of a support for the parents, which has become necessary due to the mother's illness. Whether these "support payments" can be deducted as extraordinary expenses for the brothers would need to be verified based on the demonstrable "need" of the parents. If the payments are classified as gifts, they are – as you correctly suspect – fiscally irrelevant within the tax exemption limits.

However, it is likely that the payments are cost-sharing for the living situation in A. It is important to consider that the father's business expenses for the double household management (in A) take into account that the sons also live there, thus reducing the costs of the "apartment" within the double household management area.

I hope I could help you with your considerations.

Kind regards,

Ralph J. Schnaars

STWB Steuerberatungsgesellschaft mbH
Direct contact +49 (0)171 525 20 42
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