Termination of rental to relatives
March 12, 2012 | 50,00 EUR | answered by Dipl.BW/SB Ulrich Stiller
I own a two-family house and have been renting out one apartment to my parents since 1994 (the other one is occupied by my family). The rental income has always been above the 75% threshold. From 1994 to 2004, significant losses were incurred through this rental, which were easily recognized for tax purposes. Since 2005, the situation has changed and small but growing profits have been generated, which were taxed accordingly. The current balance of losses and profits since 1994 still shows a significant overall loss of approximately 70,000 euros.
Now, my mother has been admitted to a nursing home and my parents can no longer afford to pay the rent due to the high costs.
My question is: is it possible to properly terminate the lease with my parents (i.e. through a written agreement) and allow my parents, specifically my father, to live in the premises rent-free (including without utilities), without the tax office causing any issues by referring to the total loss? Is it better to continue the lease and provide the living space rent-free, or is it better to terminate it altogether (the latter option would be preferable to me for various other reasons)? In my opinion, a deduction as a form of support is not an option, as my parents' assets currently exceed the relevant threshold of 15,500 euros.
Dear inquirer,
Thank you for your inquiry, which I would like to answer based on the information provided and in the context of your commitment in an initial consultation as follows:
According to the case law of the Federal Fiscal Court (BFH), a taxpayer earns income from rental and leasing when they intend to achieve a surplus of income over deductible expenses in the long term through renting (e.g. judgment of the Federal Fiscal Court - BFH - of July 27, 1999 IX R 64/96, BFHE 190, 125, BStBl II 1999, 826).
For close relatives, including parents, a surplus forecast is only possible if the agreed rent is at least 50% of the local market rent, but less than 75% (BFH judgment of November 5, 2002 IX R 48/01, BFHE 201, 46, BStBl II 2003, 646).
However, a surplus forecast does not apply in your case, as you have rented the apartment for over 75% of the local market rent since 1994. Therefore, the tax office cannot claim a total loss, the losses from rental and leasing incurred by you in recent years remain, as the case law assumes a long-term surplus in your situation.
The moment your father uses the apartment free of charge or pays only the ancillary costs, you no longer earn income from rental and leasing, and therefore cannot deduct any expenses = advertising costs. This means that you will no longer need to submit Annex V in the future.
You only need to inform the tax office that your mother is in a nursing home and your father can now only use the previous apartment free of charge or by paying the ancillary costs due to the high nursing home costs. You are not legally or taxably obligated to rent out the apartment.
I hope this information is helpful.
Best regards,
Ulrich Stiller
Tax consultant / Graduate in Business Administration
