Avoid taxes from leasing
March 16, 2012 | 25,00 EUR | answered by Oliver Burchardt
Facts:
I own a lake property in Bavaria, which I have leased to a private individual.
In this year's tax return, I would have to declare the rental income of approximately 350 euros per month for the first time.
I would like to pay as little tax as possible, or at least as little tax as possible, for renting/leasing my lake property.
Various potentially exploitable conditions:
We have a property that is rented out and has been declared in the tax return for many years. It is owned by my wife. We pay taxes on this income.
We have two children (both under 10 years old).
Our tax classes: 3 and 5. My wife earns approximately 15,000 euros per year in a permanent position, I earn approximately 100,000 euros per year, also in a permanent position.
We are jointly assessed (or whatever that is called;-))
Questions:
1) How can I avoid taxes/fees for renting/leasing my lake with the least financial expense?
2) Can I use my sons as recipients of the rent (using their income tax allowance)? If so, what do I need to do? - is it enough to open a separate account for them? Or...
3) Do I need to transfer the lake to them in order to legitimate them as rent recipients?
4) Would a (free) lease to my sons be sufficient? They would then act as sub-lessors to the actual lessee.
Dear inquirer,
Thank you for your inquiry, which I would like to answer as part of an initial consultation.
Please note that the tax assessment is based on the information provided. Adding, changing, or omitting information can alter the result, possibly significantly.
Unfortunately, if you lease the property in your name, I see no way to avoid paying taxes on the rental income. The same applies if you transfer the property to your wife and she then acts as the lessor.
The option of having your sons act as lessors is generally possible from a tax perspective. However, the money must truly be at your sons' disposal for this arrangement to be valid. Simply setting up a legal straw man will not hold up to a tax audit. Therefore, a free lease to your sons followed by them leasing it out will not achieve the desired tax goal. The only viable options are a paid lease to your sons or transferring the property to them. A paid lease is not feasible, as it would have the same tax consequences for you as a direct lease.
Therefore, the first step is to gift the property to your children. In the second step, they must enter into the lease agreement with your tenant. Regarding the second step, you should seek advice from a family law attorney. Your children need to be legally competent to enter into the lease. It may even be necessary to appoint a supplemental guardian because your children are entering into legal transactions where you, as parents, cannot represent them. It is not within my professional limitations to advise you on this matter. Additionally, you must consider that once the property is transferred, it will be under your children's control, as they will own it. Whether you can set effective family law boundaries that can withstand a tax audit (e.g. by establishing a usufruct or a prohibition on further sale) must be examined separately.
I hope I have been helpful in your query.
Best regards,
Oliver Burchardt
Tax Advisor
