BFH: Landlord must demonstrate intent to make a profit
Tax laws in Germany do not allow financial losses from a hobby to be offset against taxpayers’ income. And the country’s highest fiscal court – the Bundesfinanzhof (BFH) – recently confirmed in a ruling from June 20, 2023, that this principle can also be applied to renting out luxury properties (case ref.: IX R 17/21).
Under German tax law, an activity is assumed to be a hobby if it is pursued with no intention of generating a profit. One of the advantages of this treatment is that no taxes are due on hobbies. But one of the drawbacks is that any losses are not tax deductible. Commercial law firm MTR Legal Rechtsanwälte, whose fields of expertise include tax law, confirms that where there is no intention to make a profit, the activity is treated as a hobby under tax law.
Hobby letting luxury villas and tax irrelevancy
The BFH was very clear in stating that this treatment of hobbies as being of no consequence for tax purposes can also be extended to renting out luxury villas. The case in question was concerned with a couple with children who had acquired three villas, each with a living space of more than 250 square meters, and who were renting these out to their adult children indefinitely. This was generating annual losses for the parents of between 172,000 and 216,000 euros, which they sought to offset against their other sources of income, a move which would have resulted in significant income tax savings.
But this was never meant to be. The parents’ plans were ultimately foiled by the BFH, which did not allow the losses from the letting to be offset against other income. The court explained that when renting out a property with more than 250 square meters of living space, the taxpayer must demonstrate that this activity was carried out with the intention of making a profit. If they are unable to provide evidence to this end because the letting has resulted in financial losses over an extended period of time, then the activity is deemed to be a hobby that is of no consequence for tax purposes, and losses from a hobby cannot be offset against other positive sources of income.
BFH: Activity not subject to tax
With this ruling, the BFH has affirmed its previous case law insofar as there is no automatic assumption when renting out lavishly designed or furnished properties that this is done with the intention of deriving a profit and is therefore subject to tax. This, according to the court, is because a rent that adequately reflects the special residential value of these kinds of properties is often not achievable. In these instances, landlords need to demonstrate that a positive result can be achieved over a projected period of 30 years.
MTR Legal Rechtsanwälte can provide counsel on many aspects of tax law, including on how to approach tax disputes with the authorities.
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