Is it a good idea to rent your property to relatives? It can be a significant financial advantage if you are well-versed in the tax office's rules. This guide will show you how to avoid pitfalls and make the most of it.
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The topic briefly and concisely
A written rental agreement based on arm's length principles is essential for tax recognition.
To be able to fully deduct advertising expenses, the rent should be at least 66% of the local comparative rent.
Regular and verifiable rent payments by bank transfer are a must, as the tax office does not recognise cash payments.
Renting a property to the family may seem like a matter of trust at first glance. Yet, beyond the emotional advantages, there is significant potential for tax savings. If you set the rental income below market value, the deductible expenses can exceed the income, thus reducing your overall tax burden by thousands of euros per year. However, the key to success lies in the meticulous adherence to the formal requirements of the tax office. Without an airtight rental agreement and accurate rent calculation, the tax-saving model can quickly turn into an expensive repayment. We show you how renting to family members can be a secure benefit for both parties.
The Essentials
For a successful and tax-recognised rental to family members, several key points are crucial:
Written Rental Agreement: A contract designed in the same manner as one with unrelated parties is the absolute prerequisite for tax recognition.
Observe Minimum Rent: The rent must be at least 50% of the local comparative rent to be able to claim advertising costs.
Full Deduction of Advertising Costs: From a rent of 66% of the local comparative rent, advertising costs are generally fully recognised without further examination.
Provable Payments: Rent payments must be made regularly and by bank transfer; cash payments are not accepted by the tax office.
Local Comparative Rent: This figure is the basis for your calculation and can be determined from the rent index of your municipality.
These formal requirements are non-negotiable and protect you from unexpected tax back payments.
Take advantage of tax benefits through targeted reduced-price rentals
Renting to relatives offers a unique tax advantage. By setting rent below the market level, you reduce your taxable income. At the same time, you can still claim all associated advertising costs – such as depreciation, loan interest, or maintenance expenses. If this results in a calculated loss, it can be offset against your other positive income (e.g. from employment), reducing your overall tax burden. An example calculation illustrates this: with a marginal tax rate of 37% and a rental loss of 5,000 euros, there is a direct tax advantage of approximately 1,830 euros. This effect makes discounted renting a legal and effective tax-saving strategy. Therefore, the decision of whether to rent or sell should also consider this tax component. Correct implementation is crucial to securing these benefits.
Pass the tax office's external comparison: The lease agreement
The tax office scrutinises rental agreements between relatives very critically and applies the so-called arm’s length principle. This means the contract must in form and execution correspond to what would be typical between unrelated third parties. An oral contract or informal agreements are definite exclusion criteria here. A written rental contract is therefore not a recommendation, but an absolute necessity. Ensure that all essential points are clearly stipulated to guarantee full tax recognition. These include:
Precise identification of the contracting parties and the rental property (including address and area specification).
Specification of the base rent and chargeable incidental costs.
Regular rent payments by bank transfer to the landlord’s account.
An annual statement of incidental costs, just as with an unrelated tenant.
An indefinite term, as fixed-term contracts may require a complex total surplus forecast.
The question of whether to sell or rent a house you have inherited heavily depends on the willingness to comply with these formalities. Accurately calculating the rental amount is the next logical step.
Correctly determine the local comparative rent
The basis for all tax considerations is the local comparable rent. It is the key figure for calculating the minimum rent for your relatives. Since July 2022, all cities with more than 50,000 inhabitants are required to produce a rent index, which significantly simplifies the assessment process. This rent index is usually the first point of reference for the tax office. If your community does not have a rent index, you have several alternatives to substantiate the value:
The rent index of a comparable neighbouring community.
An expert opinion (which, however, is associated with costs of several hundred euros).
The rental prices of at least three comparable apartments in the vicinity.
Even a slightly incorrect assumption of the comparable rent can result in falling below critical percentage thresholds. Therefore, an accurate analysis of the rent you can charge is essential. Once this reference value is established, you can determine the specific rent amount.
The 50% and 66% Rule: The Two Steps to Full Tax Deduction for Advertising Expenses
Since 2021, a two-stage system determines the amount of allowable tax deduction for business expenses. The rent you charge is compared with the local market rent. If the agreed rent is at least 66% of the local market rent, the tax office assumes full remuneration. You can then deduct all related expenses in full without further examination. However, if the rent is less than 50%, the deduction is only partially granted. If the rent falls between 50% and under 66%, the tax office conducts a so-called total surplus forecast. This forecast checks whether a profit is likely to be made over a period of 30 years. If the forecast is positive, the full deduction remains possible. Due to the complexity of this forecast, it's usually safer to set a rent of at least 66%. This is especially true if you rent to close relatives such as your own son or siblings. However, aside from purely financial aspects, there are other factors to consider.
Do not underestimate risks and potential for conflict
Despite the financial benefits, renting to family members also carries risks that go beyond purely tax-related issues. Blending business and personal interests can lead to significant tensions. Maintaining a professional distance is crucial for long-term success. Potential points of conflict include:
Payment defaults: What happens if the family member fails to pay the rent or does so irregularly? Issuing a reminder or even an eviction is emotionally much more stressful than with a non-relative tenant.
Maintenance: Differing views on necessary repairs or urgency can quickly lead to disputes. Regular inspections are therefore advisable.
Service charges: An unclear or not timely created service charge statement can sustainably damage the trust relationship.
Gift tax: A rent that is too low over a long period can be considered by the tax office as a disguised gift, potentially triggering gift tax.
Clear communication and written agreements are the best way to minimize these risks and avoid straining the family relationship. Understanding your obligations as a landlord is equally important.
lohnt-sich-die-vermietung-an-familienmitglieder
Renting to family members is worthwhile if you are prepared to treat the tenancy like a business. The tax benefits from the full deduction of rental-related expenses with reduced rental income are significant and can reduce your financial burden by several thousand euros per year. The key is in strictly adhering to formal requirements: a written contract based on arm's length principles, accurately determining the usual local comparative rent, and complying with the 66% threshold. A precise calculation of your potential rental yield helps in decision-making. By following these rules, you create a win-win situation for yourself and your relatives. A data-driven assessment from Auctoa or a quick analysis by our ImmoGPT chat can help you accurately determine the local rent and achieve financial security. Treat family as you would unrelated tenants, and the rental will be a success.
Additional useful links
The Federal Ministry of Finance provides information about the anticipated tax changes in 2025.
The Bavarian Association of Taxpayers explains important tax aspects of renting to relatives.
An official letter from the Federal Ministry of Finance offers detailed information on § 7b EStG.
Finanztip provides useful tax tips for landlords.
The official text of § 21 EStG (Income from renting and leasing) is available on gesetze-im-internet.de.
Haufe examines rental contracts with relatives and reduced rent according to § 21 para. 2 sentence 2 EStG.
A leaflet from the Bavarian Tax Office provides information on reduced rent.
Wikipedia offers an overview of income from renting and leasing in Germany.
The Income Tax Guidelines (EStH) of the Federal Ministry of Finance contain detailed explanations of tax law topics.
The VLH (United Wage Tax Assistance) provides information on renting to family members.
FAQ
Which individuals are considered close relatives for tax purposes?
Close relatives, according to § 15 of the Fiscal Code, include, among others, spouses, fiancés, parents, children, grandchildren, grandparents, siblings, as well as their spouses and children.
Do I need to create a utility bill statement?
Yes, just as with any external tenant, you must prepare an accurate annual service charge statement for family members and handle any additional payments or credits.
What should be considered when renting out a furnished apartment to relatives?
For furnished apartments, a furniture surcharge might have to be added to the local customary rent. This can result in the 66% threshold being undercut. To avoid this, it may be advisable to gift the furniture, while taking into account the applicable tax allowances for gift tax.
How do I prove the local comparable rent?
The easiest way is the qualified rent index of your city or municipality. Alternatively, you can obtain an expert opinion or use the rents of at least three comparable apartments as evidence.
Can I also let the apartment rent-free?
Yes, but this is very disadvantageous from a tax perspective. With a rent-free provision, you cannot deduct any advertising expenses (e.g., for repairs or interest) from your taxes.
What happens if the tax office does not recognise the tenancy?
If the tax office does not recognise the rental agreement due to formal deficiencies, the entire deduction for advertising expenses is lost. This usually results in significant tax back payments.
