Effect of the amount of rent on deductions
Rental costs can only be deducted in full for properties let with a view to earning an income. This means charging rent at market value.
Letting a property at market value refers to charging reasonable rent in line with the rent rates charged for similar properties in the same locality. The market value criterion is not satisfied if a property is let at below market value to relatives, for example.
In the absence of other evidence of normal rent rates, market value can be determined on the basis of the taxable value of employer-paid housing (fringe benefit value). Read more detailed guidance on calculating the taxable value of employer-paid housing: Tax treatment of fringe benefits.
Letting a property at below market value is not considered to constitute letting with a view to earning an income. In such cases, not all rental costs can be deducted. Deductions cannot exceed the amount of rental income.
Rental losses incurred from properties let at below market value to relatives, for example, cannot be deducted.
Non-deductibility of interest on mortgages and mortgage fees incurred from properties let at below market value
No deductions can be made for interest on mortgages and mortgage fees incurred from properties let at below market value.
If rent has not been charged at market value, deductions cannot exceed the amount of rental income. Interest costs are fully non-deductible.
Example: Arto has taken out a mortgage to buy a flat. He lets the flat to his daughter, Senni. Senni’s rent is EUR 300 per month. Arto is letting the property at below market value.
The fringe benefit value of similar properties is EUR 500 per month. Arto pays a maintenance charge of EUR 300 per month for the flat, and the interest on his mortgage is EUR 150 per month. Arto can only deduct the maintenance charge (EUR 300 per month) from his rental income.
Arto needs to declare his rental income and the maintenance charges paid in his tax return even though he has no taxable rental income left after deducting the charges. Arto cannot declare the interest on his mortgage as interest deductions, as he is not allowed to deduct interest due to letting the property at below market value.
Deducting modernisation costs incurred from properties let at below market value
Modernisation costs incurred from renovations carried out in properties that are let at below market value can be deducted by the buyer in the form of depreciation expenses. However, it is not acceptable to deduct more than the rental income was: the claimed depreciation expense must not be so high that it causes a loss for the rental operation. If the calculation were to show a loss, the Tax Administration would not allow it.
Any modernisation that the buyer has not deducted in the form of depreciation can be added to the property’s total value.