Aside from appreciation, passive income, and protection against inflation, owning a home also offers tax benefits to homeowners. Investors, in particular, can deduct numerous expenses related to their property on their tax returns. In this blog post, we’ll walk you through the deductible costs.
Additional Purchase Costs Are Deductible as Part of the Purchase Price
Homeowners who do not use their apartment themselves but rent it out benefit in particular from advantages on their income tax return. In addition to the purchase price, for example, incidental purchase costs can also be claimed for tax purposes—unlike for owner-occupiers. These include both the real estate transfer tax and the expenses for the notary and the land registry entry. Year after year, property owners can deduct these expenses over the property’s expected useful life. For buildings constructed after 1925, a period of 50 years is applied; for older buildings, a period of 40 years. This means that for buildings constructed in or after 1925, two percent of the acquisition costs are deductible annually on the income tax return.
Operating Costs Paid Out of Pocket Are Deductible
Numerous ancillary costs incurred in connection with the maintenance, renovation, or operation of a property can be claimed for tax purposes. Ultimately, only the surplus remaining after deducting these ancillary costs—which is generated annually from rental income—is fully subject to income tax. In addition to costs for renovations and repairs, so-called income-related expenses—such as fees for real estate agents and rental listings incurred when a tenant moves out, as well as property management fees—are also deductible. In addition, operating costs—such as garbage and sewage fees, property tax, and building cleaning—are also tax-deductible. However, if these costs are passed on to the tenant, they must also be reported as income and thus have no actual effect on profit or the tax burden.
Renovation expenses that significantly improve the fixtures or fittings of a property represent a special case. Unlike renovations, which serve to maintain and thus preserve the property, these expenses are classified as construction costs and, like acquisition costs, can only be depreciated over the expected useful life of the property. Construction costs include, for example, the installation of a new heating system.
Even if the apartment is temporarily vacant, the owner can claim a tax deduction for all costs incurred that he would otherwise pass on to the tenant. However, the owner must prove to the tax office that he is actively seeking a new tenant.
Loan interest is also tax-deductible
Since loan interest is exclusively related to profit-oriented rental activity, it is fully tax-deductible. While the options for owner-occupiers are limited, investors generally have numerous opportunities to secure tax benefits and deduct expenses. However, since the details of the legislation can change from time to time, it is advisable to consult a tax advisor.
