What are the tax implications of renting out a property to relatives?
February 26, 2022 | 40,00 EUR | answered by Otto Dornbusch
Dear tax advisor,
my name is Oliver Hinze and I have a question regarding the tax consequences of renting out a property to relatives.
The background is that I recently inherited a property and am considering renting it out to my sister, as she is currently looking for a new apartment. However, I am unsure if there could be tax implications if I rent the property to a close relative.
The current situation is that the property is currently vacant and I am thinking about renting it out to cover at least some of the ongoing costs. Since my sister would be a reliable tenant, she would be a good option. However, I am concerned that there could be tax risks that I have not considered.
My worry is that by renting to my sister, I may potentially suffer tax disadvantages that I have not taken into account. I want to make sure that I consider all tax aspects and avoid any unforeseen problems.
Therefore, my question to you is: What are the tax consequences of renting out a property to relatives? Are there specific regulations or rules that I need to consider? Are there possible solutions or strategies to minimize tax risks? I would greatly appreciate your assessment and recommendations.
Thank you in advance for your help.
Kind regards,
Oliver Hinze
Dear Oliver Hinze,
Thank you for your inquiry regarding the tax consequences of renting a property to relatives. It is understandable that you are concerned about potential tax risks when renting your property to your sister.
In principle, it is allowed to rent a property to close relatives. However, there are some tax considerations that you should keep in mind. Firstly, it is important to know that when renting to relatives, the rental income is considered as income from renting and leasing (§ 21 EStG). This income must be declared in your tax return and is subject to income tax.
An important aspect of renting to close relatives is determining the appropriate rent. In such cases, the tax office checks whether the agreed rent is in line with market rates. If the rent is significantly below the usual market price, the tax office may adjust the rent to the appropriate value and adjust the tax treatment accordingly.
One way to minimize tax risks is to carefully document the rental contract. It is important that all agreements are documented in writing and that the rent is paid regularly and on time. Additionally, you should ensure that the rental to your sister is conducted on a commercial basis and not seen as a mere favor.
There is also the option to structure your property into a wealth management company and appoint your sister as the managing director. This way, you can take advantage of tax benefits such as the possibility of deducting advertising costs.
Overall, it is advisable to seek advice from an experienced tax advisor in your specific case to individually assess all tax aspects and minimize potential risks. I am happy to assist you with any further questions or personal consultation.
I hope that this information has been helpful to you and wish you success in renting your property to your sister.
Best regards,
Otto Dornbusch
