Effect of the amount of rent on deductions
The deductibility of rental costs depends on whether rent is charged at market value or below market value.
Various expenses related to your rental operation can only be deducted for the apartments, flats, houses, other properties that you rent out for the purpose of receiving income. This means that you charge rent at market value.
What is meant by "renting out property at market value"?
To offer property for rent at market value refers to charging reasonable rent, in line with the rent rates charged for similar properties, in the same neighbourhood, town, district, etc. The market criterion is not satisfied if you rent out property below market to your relatives, for example.
In the absence of other evidence of normal rent rates, market value can be determined on the basis of the taxable value of employer-paid accommodation (the fringe benefit's officially confirmed tax value). Read more on the taxable value of employer-paid living accommodation: Tax treatment of fringe benefits.
Deducting costs for rental properties rented below market
To rent out residential and other property below market is not considered to constitute a rental operation that aims for the production of income. In such cases, not all related expenses can be deducted. Deductions cannot exceed the amount of rental income.
For example, you cannot deduct any rental losses if the cause is that you rented the apartment to relatives and you only charged below-market rent.
Non-deductibility of interest on mortgages and fees incurred from properties rented at below market value
No deductions can be made for interest on mortgages, and mortgage fees, when the loan had been taken for buying residential property which you then rented out at below-market rent.
If rent has not been charged at market value, deductions cannot exceed the amount of rental income. Interest costs are fully non-deductible.
Example: Arto takes out a mortgage loan in order to buy a flat. Then, he rents the flat to Senni, his daughter. Senni’s rent is €300 per month. Arto is now seen as renting out property at below market value.
The fringe-benefit value for similar flats, if an employer company arranges living accommodation for the company's worker, is €500 per month. Arto pays a maintenance charge of €300 per month for the flat, and the interest on his mortgage is €150 per month. Out of these 2 monthly expenses, Arto can only deduct the maintenance charge (€300 per month) against his rental income subject to taxation.
On his tax return for the year, Arto needs to declare his rental income and the maintenance charges paid even though he has no taxable rental income left after deducting the charges. Arto cannot claim the interest on his mortgage loan as tax-deductions because he is not allowed to deduct interest, because he rented out the flat at below market value.
Deducting modernisation costs incurred from properties rented at below market value
Modernisation costs i.e. major renovations carried out in apartments, flats, etc. can be deducted in the form of depreciation expenses. However, it is not acceptable to deduct more than the rental income was: the claimed depreciation expense must not be so high that it causes a loss for the rental operation. If you charged below-market rent and the year's result for your rental operation is a loss, the Tax Administration would not allow it.
Nevertheless, you have the right to add any modernisation expense that you had not deducted through depreciation to the apartment’s total value.
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