Ask a tax advisor on the topic of Rental / Leasing

Loan from private individuals - external comparison -

January 2, 2012 | 40,00 EUR | answered by Oliver Burchardt

Hello, I would like to take a private loan from my wife to finance a rented apartment according to the attached one-sided contract. We are married under the legal regime of marital property and my wife would transfer the loan to the sellers from a checking account only in her name. A slightly higher amount (200.000 Euro) was transferred from my wife's share of assets from our joint account to my wife's account two weeks before the planned payout. Can you please check for me if the contract and procedure are comparable to financing through a bank, or if I may encounter difficulties with the tax office when deducting future interest payments. The goal of this action is only to provide a relatively short-term interim financing for a later follow-up financing with another private loan from relatives. I definitely want to avoid financing the apartment with equity. Here is the contract draft for the purchase of the inheritance shares of S. and A. XXXX (notarized by Notary Assistant xxxxxxx at the Notary Office xxxxxx in Coburg, Document No. xxxxx signed by A. Mustermann on xx.xx.2011).

Loan agreement for the purchase of the inheritance shares of S. and A. XXXX
Between the borrower Mr. A. Mustermann, residing in xxxxxxxxx, hereinafter referred to as borrower, and the lender Mrs. B. Mustermann, residing in xxxxxxxxx, hereinafter referred to as lender, the following contract is concluded:

§1 Loan terms: The lender grants the borrower a loan for the notarized purchase of the two inheritance shares of the inheritance community S. and A. XXXX.

§2 Loan amount and disbursement: The loan amount is 160,000 Euros (in words One Hundred and Thirty-Three Thousand). The loan will be disbursed in 2 installments:
1.) Installment 1 to S. XXX of 80,000 Euros to his account. No.___________ Bank code ___________
2.) Installment 2 to A. XXX of 80,000 Euros to her account. No.___________ Bank code ___________
The disbursement dates of the installments on the lender's account will determine the interest calculation. The disbursement of the loan amounts will be from the following account of the lender:
Bank: DKB Deutsche Kreditbank AG Account holder: Mrs. B. Mustermann Account No. --------------- Bank code: 120 300 00

§3 Interest rate and adjustment: The interest rate is 2% per year. Interest payment is made annually on December 31st for the previous calendar year. However, the first interest settlement will not be earlier than December 31, 2012. If the loan is terminated by one of the contracting parties, the interest payment will be made no later than 8 weeks after the repayment amount is received in the lender's account. Either party may request a change in the interest rate in writing on the

Oliver Burchardt

Dear inquirer,

Thank you for your inquiry, which I am happy 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 potentially alter the result significantly.

In general, such construction loans are typically secured primarily by the registration of a mortgage. This is not the case here. Nevertheless, the interest rate on the loan is below the current rates, which are around 2.5% (depending on the term and creditworthiness). This violates the arms-length principle.

This problem can be solved in two ways:
- Either you increase the interest rate, or
- You provide first-ranking security by registering a mortgage.

Section 6 of the contract is not sufficient here, as it already complies with legal regulations.

I also view critically the transfer from the joint account to your wife's account, from which the loan is then granted. You are required to prove that this money truly belongs to your wife's assets and that you are not granting yourself a loan.

In principle, your approach is feasible with a written documentation as outlined in the contract.

However, this will not result in tax savings. While you can deduct the interest paid to your wife as advertising costs, your wife must declare the received interest as income from capital assets. If you are jointly assessed, your taxable income will not change, leading to the same tax burden.

I hope my explanations have been helpful to you.

Best regards,

Oliver Burchardt
Certified Public Accountant
Tax Advisor