Tax tip: Rent out a holiday flat wisely

More than 1.2 million people in Germany own a holiday home or holiday flat. Depending on their preference, they either use them exclusively themselves or rent them out, usually via an authorised agent.

The latter case can lead to tax difficulties. This was the case for a married couple who rented out several holiday flats to an agent. The agent rented out the holiday flats to guests in the manner of a hotel and offered special services such as breakfast in the neighbouring hotel and daily cleaning. The agent invoiced the costs for the hotel stay, including breakfast and ancillary costs, under his own name and transferred the rent to the couple on a quarterly basis.

It was undisputed that the agent's service was to be considered a hotel-type rental, which leads to commercial income. However, it was questionable whether the agent's service was also attributable to the couple, who had not previously declared income from commercial operations within the meaning of Section 15 of the Income Tax Act, but rather rental income in accordance with Section 21 of the Income Tax Act. The advantage of rental income compared to income from a business is that the sale of the holiday flat after ten years or, in the case of exclusive owner-occupation, even for shorter periods is income tax-free and no trade tax is payable on the rental. If the property is a business, any capital gain is always taxable.

The tax office and, subsequently, the tax court attributed the commercial income of the agent to the couple as the trustors of the flats. In its judgement of 28 May 2020 (IV R 10/18), which has only now been officially published, the Federal Fiscal Court did not follow the view of the tax office and ruled in favour of the taxpayers that the typical hotel services provided by the agent do not rub off on the holiday flat landlords and that they continue to generate rental income.