Ask a tax advisor on the topic of Rental / Leasing

Self-use of a previously used apartment as an investment.

May 22, 2019 | 75,00 EUR | answered by Steuerberater Knut Christiansen

Dear Sir or Madam,

I have the following question: I am divorced and jointly own 11 condominiums in Germany with my former wife, which we rent out as an investment. We have a joint bank account through which all income and expenses related to the apartments flow. We operate as a GbR for the rental of our apartments. We file our tax returns separately, with the share related to the condominiums being identical, as each of us has a 50% share and income and expenses are shared.

I will now move into one of our shared apartments myself. My partner and our child will also move in with me. (We are not married.) My former wife should continue to receive half of the rent she received through the rental before. She should also continue to pay half of the non-deductible costs, such as maintenance. Through my own use, nothing should change for her compared to the previous rental.

I am aware that I will lose the benefit of the 2% depreciation when I self-occupy. My first question is whether this will only take effect at the time of my move-in, or if the depreciation can also be retroactively revoked. We purchased the apartment in 2012 and it was definitely planned as an investment property and has been used as such until now. The decision to self-occupy has only arisen now due to changes in my personal circumstances.

Since my former wife is still a 50% owner and continues to receive half of the rental income, I assume that she would not be affected by the loss of the depreciation. Is this correct?

The next question concerns the formal regulation of the "lease agreement." Since I am moving in with my partner and child, she should of course have the same tenant protection rights as a non-owner, should anything happen to me. She would then live in the apartment alone, with my ex-wife (and an inheritance community for my share) as the landlord. I had in mind that the GbR consisting of my ex-wife and myself would enter into a lease agreement with my partner and myself as individuals. I would then pay the rent in full from my personal account to the joint real estate account of my ex-wife and myself. This would be the most elegant solution in my opinion. My partner has all the rights as a tenant and my former wife continues to receive the income through the joint account.

However, I would pay 50% of the rent to myself. However, as an individual to myself as a GbR partner. Would this be possible? In principle, I would then have to pay taxes on my rent payments to myself. On the other hand, I could then retain the depreciation and could also deduct any current renovation work? Or does it not work like that?

Would it be a better solution if my partner is the main tenant towards the GbR consisting of me and my ex-wife? In this case, it would be a completely normal tenancy as before. Both owners would retain the depreciation and could deduct the current renovation costs. However, I do not know how the tax office would view it if I suddenly have the same address as my rental apartment and indicate that the apartment where I live is rented out. Additionally, my partner is currently unable to pay the rent due to her parental leave. The rent payment would come entirely from me.

I would appreciate it if you could show me the best scenario regarding the retention or avoidance of a retroactive revocation of the 2% depreciation, as well as the possibility that I can deduct current renovation costs as much as possible. (Assuming that this is possible.)

Steuerberater Knut Christiansen

Good evening and thank you for your inquiry, which I would like to answer as part of an initial consultation.

The tax authorities have determined that a rental agreement between a partnership and one of its partners is not recognized to the extent that the rental is to a partner. In your case, this would mean that no income would be generated for half of the apartment you are renting (and therefore all costs including depreciation and renovation costs allocated to you cannot be deducted). However, this only applies from the point at which you rent the apartment yourself. There will be no retroactive removal of deductible expenses. Once you rent out the apartment to someone else, the rental agreement would be fully recognized again.

You could try to only enter into the rental agreement with your current partner in order to present a "normal" rental agreement externally. However, this could be seen as abusive by the tax authorities. A landlord would typically not rent out an apartment to someone who has no income. Therefore, there is a risk that this rental agreement would not be recognized, leading to the same consequences as mentioned above. I cannot say whether the tax authorities will notice that you are registered at your own apartment. On the other hand, you are obligated to provide support to your partner due to your child. You could transfer the money for rent to her, so she can then forward it to the partnership as rent for the apartment she is renting. There is still a residual risk, but I believe it is manageable.

I hope this information helps. Please feel free to ask any further questions.

Best regards,

Knut Christiansen
Tax consultant