Intention to make a profit when renting to family members
February 15, 2013 | 100,00 EUR | answered by Michael Herrmann
Dear Sir or Madam,
In 2012, I purchased an apartment, financed almost 100% with external funds, with completion in 2013. This is rented out to my mother (who is now 70 years old) at a minimum of 66% of the local market rent.
In approximately 10-15 years, my mother may no longer be financially able to continue paying the rent (due to a low pension and depleted savings).
1. Can I use this argument in the future to waive the rent and/or no longer claim this apartment in my income tax return as of that point (thus no longer claiming any losses/depreciation, etc)?
2. How many years retroactively could the tax office assume hobby loss and retroactively cancel losses?
3. Can I avoid potential hobby loss if I intend to rent out the apartment at market prices to third parties after my mother's death or move to a nursing home? (Effectively suspending the intention to generate profits for a few years)
4. Would it be relevant for the assessment of the situation if taxable income had been generated in the previous years at the time the rent was waived, as opposed to continuous profit-seeking until that date?
5. If the apartment is sold after 15 years, can the tax office assume hobby loss if it is already apparent today that no tax surpluses will be generated until the time of sale?
Thank you.
Dear questioner,
first of all, thank you for your inquiry, which I would like to answer based on the information provided and in the context of your commitment to an initial consultation. The response is based on the description of the situation. Missing or incorrect information regarding the actual circumstances can affect the legal outcome.
1) Once you earn less than 66% of the comparable rent, the advertising costs can only be deducted proportionally. Providing accommodation for free will result in the termination of the lease. You will then not generate any rental income.
2) The tax office can change a tax assessment within the statute of limitations. This is usually four years, starting at the latest two years after the end of the tax year, but it can also be interrupted. However, a prerequisite is that the tax assessments have been made subject to review or provisionally regarding rental and leasing income.
3) According to prevailing case law, the tax office must assume the intention to make a profit in the case of long-term rental activities. Rental activities are considered long-term if an indefinite lease was initially signed. Even a fixed-term lease would not be detrimental if it is extendable.
4) Hobbyism, i.e. a lack of profit motive, can only be assumed in the case of long-term rentals if it was clear from the start that only losses would be incurred. Providing accommodation at a reduced rate to relatives may make it difficult to achieve a total profit over the rental period, but it is generally permissible even in the case of years of losses if there is a long-term rental agreement.
5) This would only be the case if the sale is already planned today and is evident to the tax office. As long as the achievable rent exceeds the significant costs of depreciation and interest expenses in the long term, the tax office will not doubt the intention to make a profit.
I hope that these explanations have provided you with a sufficient overview of the situation within the scope of your commitment and this initial consultation.
Yours sincerely,
Michael Herrmann
Graduate Financial Economist (FH)
Tax consultant
