Rental Income and Income Tax – What Do Landlords Need to Know About Taxes?
Real estate is a very popular investment. Renting out residential property is a good source of income, which, of course, is also closely monitored by the tax authorities. Rental income must be reported on your income tax return and is subject to taxation. As tax advisors in Düsseldorf
and Oberhausen
, we regularly see landlords providing incorrect information or failing to report certain income at all. Errors or even fraud are severely penalized by the tax authorities. With this article, we therefore aim to provide guidance for all landlords. The following overview explains the most important aspects of taxable rental income.
What rental income must be reported on the tax return?
In principle, the tax office does not care how or from what sources income is generated. As soon as income is earned, it must be reported for tax purposes. Accordingly, all rental income is relevant for tax purposes. Therefore, income from the rental of the following must be reported on the tax return:
- private condominiums
- private houses
- apartments in your own home
- undeveloped land
- vacation rentals
- vacation homes
Subletting a room in your own apartment must also be reported for tax purposes. In addition to the actual rental income, all utility costs must also be declared as income. Utility costs are often listed only as expenses on tax returns. However, people forget that these costs are initially also considered income.
Where are rental income reported on the income tax return?
Rental income is defined as income from renting and leasing. Details are provided in Schedule V of the tax return. For those unfamiliar with tax matters, it is advisable to hire a tax advisor to prepare the tax return. Errors can easily creep in, especially when dealing with many different sources of income and expenses. A qualified tax advisor ensures that income from renting and leasing is reported correctly in both content and form.
Tax-Exempt Threshold for Income from Rental and Leasing
Rental income is tax-exempt only in the case of very short-term subletting. If the income from subletting for the entire year is less than 520 euros, it remains untaxed. For most landlords, however, this rule is irrelevant due to significantly higher income. It is also important to note that this is not a tax-free allowance. If the income exceeds the specified limit, the full amount is taxed without any corresponding deductions.
In addition to this special rule, the basic tax-free allowance naturally applies to rental income. If rental income and all other income do not exceed the basic exemption, the income remains tax-free. However, this basic exemption is also exceeded in the vast majority of cases. Income that exceeds this amount is taxed at the individual’s personal tax rate.
When must rental income be reported for tax purposes?
Rent payments must be reported and taxed each year as part of your income tax return. Every year in which rental income is deposited into your account is relevant for tax purposes. Advance payments may be due throughout the year. You should consult a tax advisor to determine whether this is necessary in your case.
Objective Net Principle for Renting and Leasing
Tax law stipulates that only a net gain should be taxed. This means that taxes are only due if a profit was actually realized overall. Accordingly, under the objective net principle, income is offset against related expenses. The result is either a profit or a loss.
Profits are subject to tax. If a loss results, it can be offset against other sources of income. Losses from renting and leasing can thus provide tax benefits for other income.
Which income-related expenses can be deducted?
As already explained, expenses must be deducted from rental income. Expenses are reported as income-related expenses on the tax return. Under tax law, income-related expenses are defined as expenditures that serve to acquire, secure, and maintain income. Therefore, only those expenses that are directly related to the source of income may be claimed as income-related expenses for rental income. The following expenses are considered income-related expenses for renting and leasing.
- Financing Costs
Real estate often needs to be financed with loans. The interest incurred on these loans is deductible as income-related expenses. Often, the interest on these loans is overlooked on the tax return. For landlords, however, this expense can add up to significant amounts!
- Utility costs
We have already explained that utility costs must be reported as income. However, utility costs may also be entered as expenses. All utility costs related to home ownership may be deducted. These include:
- Utility costs based on the utility bill
- Heating costs
- Water costs
- Building insurance
- Property tax
- Real estate agent commission
In some cases, there are additional deductible ancillary costs. It may therefore be advisable to consult with a qualified tax advisor to determine which expenses may be deductible. Our team is happy to assist you. It is very important that you keep all receipts and invoices!
- Improvement costs for real estate
It is not uncommon for landlords to have new features installed in an apartment or house to increase its value. For example, if a second bathroom or a pool is built in the garden, this is considered a construction expense. Costs for such “construction” can only be claimed for tax purposes over several years.
- Costs for maintaining the property
Real estate must be regularly maintained, renovated, or modernized. The resulting expenses can be deducted in full as income-related expenses. Typical expenses for maintaining a property include, for example:
- Bathroom renovation
- Re-roofing
- Flooring
- Upgrading the electrical system
- Facade renovation
- Water pipe replacement
- Clearing drain blockages
- Replacement of windows and doors
- Elevator maintenance and repair work
Of course, other expenses are also tax-deductible. A tax advisor can help if you’re unsure.
All of the expenses listed above can be claimed as income-related expenses and thus reduce your tax liability. As a landlord, expenses can quickly add up to a substantial amount. Repairs and renovations, in particular, can result in high costs. You should therefore never fail to claim all possible tax-deductible expenses. A good tax advisor can help you avoid mistakes and ultimately save money. In many cases, the tax advisory services themselves can even be claimed as an expense.
Tax Consulting in Düsseldorf and Oberhausen
In Düsseldorf and Oberhausen, we are the go-to resource for business owners and landlords. Our team of qualified tax advisors and other experts will assist you with your tax return and answer any questions you may have. With our service, you’ll save time, reduce stress, and possibly even save money! We look forward to providing you with comprehensive advice. Simply contact us to schedule a consultation.
