Designing the real estate financing for rental among relatives
September 3, 2014 | 50,00 EUR | answered by Anton Pernitschka
Father and son are buying a single-family house together for 500,000 euros and will each own half of it. The son will live in the house.
The father wants to rent out his half of the house to his son at a reduced rate as part of a "discounted rental among relatives".
For the financing of the house, the father contributes 120,000 euros in equity, and the son contributes 80,000. The rest is to be financed through a bank.
What should be considered in the design of the financing so that the tax office recognizes the father's losses from the discounted rental?
Is it sufficient if the father and son have two separate loan agreements at the same bank and each pays their installments?
Does it matter that different amounts of equity were contributed?
Dear inquirer,
In the context of an initial consultation and your fee contribution, while considering the regulations of this forum, I would like to answer your question.
Losses from rental and leasing activities are generally recognized by the tax authorities even if they accumulate over years. However, fixed-term leases can often be detrimental for tax purposes; because with fixed-term leases, the tax office can assess the intention of generating income only for the duration of the lease. Nevertheless, in individual cases, prolonged, unusually high losses combined with an extremely low rent agreement may result in the losses not being tax deductible. It should be ensured that the rent is higher than the depreciation of the property.
If the lease agreement is generally acceptable, the father and son should each take out (the remaining) bank loan roughly in half and enter into corresponding loan agreements. For example, if the father were to deduct all the loan interest as advertising costs, unusually high losses may not be recognized by the tax office.
Differences in equity, on the other hand, generally have no tax significance in the present case.
The response was provided based on the information provided in your statement. Missing or incorrect information about the actual circumstances may affect the legal outcome.
Best regards,
Anton Pernitschka
Tax advisor
