Is equipment rental subject to tax?

Rental and leasing income

Rental and leasing income

Udo Reuss
Tax Expert

Udo Reuss

The tax lawyer and business graduate Udo Reuß is responsible for tax issues at Finanztip. Before that, he worked for various business and specialist publishers such as Handelsblatt, F.A.Z.-Verlagsgruppe, Haufe-Lexware and Vogel Business Media - 14 years of which he worked as editor-in-chief of trade magazines. He draws the relevant judgments for tax savers from the complex tax law.

Income from renting and leasing is part of the surplus income for income tax, unless such income is generated in the context of a commercial enterprise. Then it is income from business operations. The legal basis for income from renting and leasing can be found in income tax law in Section 21 of the Income Tax Act.

Rental of property and property

Anyone reading the legal provision in Section 21 may be wondering why income is listed here, because rental is rental, regardless of whether it is an apartment or a car. Income tax law is a bit more precise. According to the provision of Paragraph 21 of the Income Tax Act (EStG), income for temporary leasing is recorded by

  • immovable property, i.e. land, buildings and parts of buildings (apartment)
  • Material included, in particular of movable business assets (e.g. computer system)
  • Rights, in particular of literary, artistic and commercial copyrights
  • the sale of rent and lease payments

In addition to the type of income “renting and leasing”, the 7th type of income is “other income” within the meaning of Section 22 of the Income Tax Act. The following text can be found in paragraph 3: "Income from services, insofar as it does not belong to other types of income (Section 22 (1) sentence 1 numbers 1 to 6) nor to income within the meaning of numbers 1, 1a, 2 or 4, for example income from occasional brokerage and from the rental of movable property. Such income is not subject to income tax if it was less than 256 euros in the calendar year. "

The occasional renting out of your own car belongs to the "other income" and not to the income from renting and leasing.

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Be careful if the rent is too low

Many years ago it was a popular tax-saving model: you rented out within the family, to close relatives or friends for a small rent. Consequence: The rental income subject to income tax was very low.

This “tax-saving model” of discounted rental still works within limits. However, you have to note that the rent for renting an apartment for residential purposes is at least 66 percent of the local market rent. If the agreed and paid rent is lower, the transfer of use is to be divided into a paid and a free part (Section 21 (2) EStG). It should therefore be noted that the advertising costs must be reduced proportionally if the rent is less than 66 percent of the local rent.

Advertising expenses for renting and leasing

Income is all income accruing from the rental, i.e. the gross rent is to be recorded as income. If there is no proportional reduction in the advertising costs - as just explained - all costs must be deducted from the gross rent in order to arrive at the amount "income from renting and leasing". Typical advertising expenses include

  • the exact time depreciation (deduction for wear and tear) on the building
  • expenses borne by the landlord (e.g. water, electricity, garbage collection)
  • the property tax paid in the same calendar year
  • the financing costs (interest on mortgage, land charge, discount), insofar as they are directly related to the apartment
  • the house allowance (housing allowance) for a condominium (but without an addition to the maintenance reserve). Sometimes tax authorities also accept the normal contributions to the maintenance reserve
  • Costs for legal advice and prosecution in connection with the tenancy
  • Insurance in connection with the rented apartment (e.g. residential building insurance, proportional legal protection insurance)
  • Administrative costs (office supplies, travel expenses to the rented property and owner meetings)
  • further costs caused by the rental

Expenses for work on the building

The deductibility of expenses is very important for rental income. In the past, declared tax-saving models were sometimes sold at the kitchen table, for example as so-called builder models or buyer models.

In many cases, the main argument was the prospect of tax savings due to tax-deductible expenses. For a landlord, knowledge of the differences between production costs and maintenance costs is therefore very important, because this tax differentiation is sometimes even a prerequisite for carrying out such a construction project or building modernization. The article Delimitation of acquisition costs or production costs to maintenance costs explains this important distinction in detail.

In this context, the term “cost close to acquisition” should also be mentioned. This term is used to “explain” expenses for repair and modernization shortly after the acquisition of a building if certain criteria are met at acquisition and production costs.

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