Review of the intention to generate income when letting properties with more than 250m² of living space - BFH ruling of June 20, 2023 - IX R 17/21

 

In the aforementioned judgment, the plaintiffs rented a total of three single-family homes to their (adult) children for an indefinite period. The single-family homes were purchased in 2003, 2007 and 2008 and were fully financed by borrowing. The purchased single-family homes have living areas of 322m², 290m² and 331m². The borrowing rates were adjusted in 2017 and 2019.

 

The letting resulted in annual losses of between € 172,000 and € 216,000 for the taxpayers. The plaintiffs offset these losses against their other income, resulting in considerable income tax savings. For the disputed assessment periods 2011 to 2013, the excess income-related expenses claimed by the plaintiffs for income from letting and leasing were initially assessed by the tax office as declared. However, tax recognition was denied as a result of a subsequent external audit. An appeal against the decision was unsuccessful, as was an appeal to the Baden-Württemberg tax court.

 

In the present ruling, the Federal Fiscal Court (BFH) has allowed the appeal against the first-instance decision of the Baden-Württemberg tax court (ruling of January 22, 2021 - 5 K 1938/19) as well-founded and ruled as follows in the two guiding principles:

Income from letting and leasing in accordance with Section 21 para. 1 sentence 1 no. 1 EStG is generated if land, buildings or parts of buildings are provided for use in return for payment and the intention is to generate a surplus over the period of use (see e.g. BFH of 17.04.2018 - IX R 9/17, BStBl. II 2019, 219). In accordance with Section 21 para. 1 sentence 1 no. 1 EStG, it must be assumed that the taxpayer intends to generate a sustainable income surplus in the case of a permanent rental activity, even if there are only income-related cost surpluses over a longer period of time (see e.g. BFH of 06.10.2004 - IX R 30/03, BStBl. II 2005, 386). This applies in particular to rented apartments.

 

The standard local market rent is generally used to determine the utility value of an apartment. In the case of a lavishly designed or furnished apartment, it is often difficult to use a comparable local market rent. In these cases, it is often not possible to assume a sustainable intention to generate income (see e.g. BFH of 06.10.2004 - IX R 30/03, BStBl. II 2005, 386). According to the previous case law of the BFH, a lavishly designed or furnished dwelling can be assumed if the living space exceeds 250m² (cf. e.g. BFH of 09.09.1997 - IX R 52-94, BStBl. II 1997, 818). In addition, park-like gardens, a swimming pool, fitness studio or sauna can also lead to a lavishly furnished dwelling, even if the living space is less than 250m² (cf. e.g. BFH of 09.09.1997- IX R 52-94, BStBl. II 1997, 818).

 

The justification in relation to an area-based demarcation is generally based on the lack of a rent index for apartments of this size. Accordingly, a local market rent cannot be determined in a meaningful way. Nevertheless, the taxpayer is free to prove the intention to generate income.

 

The BFH generally adheres to the provisions of Section 21 (2) sentence 2 EStG introduced by the StVereinfG 2011 as of 01.01.2012. This means that apartments are considered to be rented out for a fee if the rent for a permanent tenancy is at least 66% of the local market rent. Nevertheless, the BFH draws a distinction here and regards the intention to generate income as a separate requirement to be examined. Accordingly, the actual circumstances and not any fictitious circumstances such as rent increases or interest rate reductions are decisive when examining the intention to generate income in the total surplus forecast. In particular, a 30-year forecast period is assumed.