Deductibility of partially rented residential property
March 22, 2012 | 40,00 EUR | answered by Matthias Wander
Following situation:
Mother (receives disability pension, will receive regular retirement pension in 2 years) owns a single-family house (built in 1994) that is not yet fully paid off, and lives on the ground floor. I (self-employed) live with my family on the upper floor (with own kitchen/bathroom). Currently, I live rent-free.
There is a consideration for me to buy the house from my mother (financed) in order to possibly deduct the loan interest for tax purposes. My mother would continue to live on the ground floor (with lifelong right of residence). I would take over the current financing (which still has 6 years remaining).
Now the questions:
1. Is it possible to deduct loan interest for a partially rented single-family house?
2. How is the proportion of deductible interest calculated? Based on the square meters of living space?
3. Can/I allow my mother to live in the apartment on the ground floor rent-free in exchange for a lower purchase price? How would this affect the deductible loan interest?
4. I want to use the extension (garage) as an office (needs to be renovated). How can this be considered in the acquisition costs of the property for my self-employment?
5. Does the surplus from the loan from the sale have an impact on my mother's disability pension?
6. If necessary, I will carry out renovation work (flooring, walls) as part of the purchase. Can these costs be considered? Do the works need to be done simultaneously with the purchase, or do I have some time after the purchase?
7. What else should be considered?
When things become concrete, I will of course discuss the situation with my tax advisor. These questions are for my clarification and preparation to determine if it makes sense at all.
Thank you for your detailed response!
Dear inquirer,
Thank you for your inquiry, which I would like to answer based on the information provided and in the context of your situation as part of an initial consultation.
1. The deduction of loan interest is possible for a partially rented house. However, the rental must be done for consideration. Loan interest cannot be deducted for the self-used part of the house. For the part that your mother uses, loan interest can only be deducted if you rent it out to your mother for consideration. No advertising costs can be deducted for rooms provided free of charge. If your mother has a right of residence, a rental for consideration is not possible.
2. The division is based on square meters.
3. The rent-free provision has nothing to do with the purchase price. This does not affect the loan interest. Furthermore, the difference between the purchase price and the market value is a gift tax-relevant transaction.
4. If you were to buy the house from your mother and then use the garage for your business, the garage may need to be included in the business assets. You should discuss this with your tax advisor beforehand. However, any later renovations will not affect the purchase price.
5. For determining a capital gain, the original acquisition costs are subtracted from the selling price, not the loan. Any profit from the sale of a self-used house is not taxed. Since there are no taxable income, it should not affect your disability pension.
6. Renovation costs can be deducted for tax purposes if they are incurred for the rented part. However, it must be determined whether they are immediately deductible advertising costs or capital expenses. The labor portion in the invoices for privately used spaces can be deducted as craftsman services under certain conditions.
7. Taking over the loan is a transaction for consideration, meaning the acquisition costs would be the purchase price + taking over the loan.
Your plan is disadvantageous from a tax perspective. Firstly, you would not be able to deduct the loan interest or renovation costs (exception: craftsman services) for tax purposes. Additionally, you would be creating business assets, which has the disadvantage that any increase in value (hidden reserves) must be taxed upon later sale or withdrawal. The fact that you can partially claim the costs for the garage used for business purposes is of minor importance.
I recommend discussing your plan with your tax advisor beforehand. They can surely suggest a more tax-efficient solution.
I hope I was able to assist you within the scope of your question.
Kind regards,
Wander
Tax advisor
