Renting to relatives
March 10, 2011 | 30,00 EUR | answered by Dipl.BW/SB Ulrich Stiller
Hello,
we have the following situation:
Ownership of a condominium split 50/50 between my wife and myself. Last year, we moved into our new townhouse. My father-in-law and his wife moved into our apartment.
When financing the house, we included the expected rent for the financing bank (we also signed an official rental contract for the bank) and provided bank statements to show the payment flow for the bank. I applied the 75% rule (for relatives).
It is now the case that I changed employers in 2010 and my income has improved to the extent that we are no longer reliant on rental income. Since we have been financially supported by my wife's father, it has been suggested that we completely waive the rent (except for utilities).
My question is:
- We want to waive the rent in the future so that no positive income is generated. I understand that this will result in the loss of depreciation deductibility, etc. Are there any other disadvantages associated with this decision?
- What about the rents paid since 06/2010 - should these be included in the tax return? I may be willing to forego depreciation allowances.
My concern is that I want to handle this correctly but am unsure if there will be any disadvantages or questions from the tax office due to the retrospective rent waiver.
Thank you.
Dear Inquirer,
Thank you for your inquiry, which I would like to answer based on your information and in the context of your rental property as follows:
You are, of course, free to rent out the apartment or not.
With the chosen design, you were able to deduct the expenses for the apartment, including the interest on loans and depreciation, in full as advertising costs in the rental and leasing income category. If this resulted in a loss, you could offset this loss with other positive income and thereby save income tax.
If you now decide not to rent out the apartment, this loss from rental and leasing income will no longer apply in the future, and your income tax burden will increase. You must take this into consideration in your deliberations, as you cannot deduct advertising costs such as interest on loans and depreciation from a rent-free apartment. I cannot determine from a distance whether there will be a loss from rental and leasing income.
If there is a surplus and you can forgo rental income, it may make sense to leave the apartment rent-free in the future.
If you now decide not to rent out the apartment from 2011 onwards, any potential losses from rental and leasing income may not be recognized by the tax office, as there is no intention to generate income, since it is only a short-term third-party rental (Federal Fiscal Court decision of 29.03.2007 BFH/NV 2007 page 1847).
As long as the apartment is rented out, you must declare the income from rental and leasing by comparing the rental income with the advertising costs by submitting Annex V to the income tax return.
I hope I could be of assistance.
Best regards,
Ulrich Stiller
Tax consultant/Diploma in Business Administration
