What are the tax consequences when renting out to family members?
January 11, 2022 | 40,00 EUR | answered by Lorenzo Hartmann
Dear tax advisor,
My name is Renate Klinger and I am the owner of a property that I rent out. In the near future, I plan to rent the property to my daughter, as she is looking for a place to live. I am aware that rentals to family members are subject to special tax scrutiny and therefore want to weigh all possible consequences beforehand.
The current state of my property is as follows: It is a well-maintained apartment that has been rented out to external tenants so far. Rental income is an important part of my income and I want to ensure that renting to my daughter will not have any negative effects.
My concerns are mainly related to the tax consequences of this rental. I wonder if I will still be able to claim deductible expenses and how the rental income from my daughter will affect my tax liability. Additionally, I am unsure if there are specific regulations that I need to follow in order to avoid any potential tax risks.
Therefore, my question to you is: What are the tax consequences of renting to family members and what solutions are available to me to minimize tax risks? I appreciate any advice and support to ensure that the rental to my daughter is tax compliant and optimized.
Thank you in advance for your help and guidance.
Sincerely,
Renate Klinger
Dear Mrs. Klinger,
Thank you for your inquiry regarding renting out your property to your daughter and the potential tax consequences that may arise. It is understandable that you are concerned about possible risks and impacts on your tax burden, and I will be happy to provide you with all the information and possible solutions.
First of all, it is important to know that rentals to family members are scrutinized for tax purposes to ensure that the rental is done at market rates and that no tax arrangements are made to avoid taxes. In your case, this means that the rent you charge your daughter should not be too low and should be in line with local market rents. Otherwise, the tax office may classify the rental as a hobby and not recognize any deductible expenses.
Regarding deductible expenses, you can generally claim normal costs such as maintenance costs, management costs, property tax, insurance, or loan interest when renting to family members. However, it is important that you document and prove these costs in order to claim them as deductions on your taxes.
The income from renting to your daughter will generally be reported as rental income on your tax return. This income is subject to income tax and must be reported on your tax return. The rental income will be reduced by the deductible expenses, so only the actual profit is taxed.
To minimize any tax risks, it is advisable to have a rental agreement with your daughter that clearly defines the conditions of the rental and specifies the rent. Additionally, make sure the rent is at market rates and that payments are documented. Proper documentation of deductible expenses is also crucial to be able to claim them as deductions.
Overall, it is important that the rental to your daughter is transparent and well-documented to avoid any tax problems. I am happy to assist you with any further questions and provide guidance on how to properly and optimally structure the rental for tax purposes.
Best regards,
Lorenzo Hartmann
