Modernization and acquisition ancillary costs for temporary rental with subsequent owner occupancy
July 31, 2009 | 30,00 EUR | answered by Irmingard Huber-Stempfel
Dear Sir or Madam,
On 01.10.2009, we will be acquiring a single-family house from the seller. Since she is currently building her own house, she will be paying us a monthly net cold rent of 572 EUR (143 sqm at 4 EUR) for her old property from 01.10.2009 until approximately April/May 2010; our interest expense for the loans amounts to around 500 EUR per month. In May/June 2010, we will then use the property ourselves. My question is: what options are available to have any necessary renovation work (such as buying wallpaper, paint, having windows painted, etc.) done during the rental period, and then claim these expenses as part of income from letting and leasing? Can we also deduct the acquisition costs (real estate transfer tax, notary fees) and generate negative income from letting and leasing to offset against other types of income? Should the rental agreement be regulated in the notarial purchase contract or with a standard private rental agreement? Is it advisable to specify a term for the tenancy? Thank you for your offer!
Kind regards,
I will answer your questions as follows:
1. The rental agreement should not be regulated in the notarial purchase contract under any circumstances. A standard rental agreement should be used. In your case, a tenant-friendly contract may be advisable, as in this case the landlord takes on more burdens.
2. The rental relationship should not be limited for tax reasons. Income from renting is generally present when a rental activity intended to be permanent is planned. The rental activity is considered permanent if it is not subject to a time limit (BFH IX R 1/04, BStBl II 05,211).
3. In principle, rental income should be assumed as income. This is only not the case if there are indications that the rental activity is not intended to be permanent. Therefore, under no circumstances should you mention future self-use (even in any loan agreements that may be presented). According to BFH IX R 7/06 BFH NV 07/1847, a short-term rental before intended self-use indicates a lack of intention to earn income. This judgment undermines the rental construction, provided that the tax office is aware of this case law. As a result, the rental income would not be taken into account and the advertising costs would not be deductible. This is the major issue in this case. The tax office may provisionally assess the determination of income intentions for 2009. In 2010, if the tax office becomes aware of the self-use (address), the determination for 2009 can be changed in this regard.
You should pay attention to the assessment of a customary rent. Rents below 75% of the customary rent may lead to a reduction in advertising costs. The rent of 4 € per m² appears to be very low, at least for the Southern German region.
4. Acquisition costs (notary fees, registration costs, real estate transfer tax, etc.) are part of the acquisition costs and can only be considered for tax purposes through depreciation (2% per year). An immediate deduction in the year of payment is not permitted. Acquisition costs for the building, not the land, are subject to depreciation. The acquisition costs including incidental costs should be divided between land and building. The costs of mortgage registration (notary and court fees) should be treated as advertising costs in the year of payment.
5. Renovation costs (repair costs) carried out and paid for during the rental period are assumed to still be incurred due to the rental activity according to BFH v. 10.10.2000 IX R 15/16 BFH NV 2001,365). However, they should be renovation costs that the landlord usually bears (this seems doubtful to me when it comes to buying wallpaper).
6. In addition, reference is made to § 35a EStG. During the period of self-use, artisan services (labor costs and flat-rate travel expenses), if they do not fall under production costs (= everything that is new in addition to the old stock), can be deducted from taxes in the amount of 20% of €6,000, max. €1,200.
If you have any further questions or if the answer is not clear, you have the opportunity to ask for clarification.
