What is income from renting and leasing?
According to §21 of the German Income Tax Act (Einkommensteuergesetz, EStG), income from renting and leasing includes income from:
- Renting and leasing of immovable assets such as buildings, parts of buildings, land, ships, and rights equivalent to property (e.g. hereditary building rights). This also includes renting/subletting a house, apartment, room, vacation home, etc.
- Renting and leasing of movable business assets (e.g. technical equipment, tools, machines, vehicles)
- Temporary transfer of literary, artistic, and commercial copyrights
- The sale of renting and leasing interest receivables (Zinsforderungen)
Security deposits (Kautionen) from tenants do not count as rental income as long as you do not access them.
How is rental income taxed?
Income from renting and leasing is one of the seven types of income in Germany subject to income tax. Taxes are due on this income just as they are for traditional employment wages or wages from self-employment. Rental income can be entered on form V of your tax return.
In German tax law, rental income is classified as “surplus income” (Überschusseinkünfte), not as “profit income” (Gewinneinkünfte). This means the excess income after paying expenses, namely income-related expenses (Werbungskosten), is taken into account. Rental income doesn’t only consist of the net rent (Kaltmiete) or the lease (Pacht), but also of the tenant-paid utility costs (Nebenkosten). Since utility costs cannot be kept for yourself, you can enter them as income-related expenses on your tax return.
The amount of rent you are paid for your property plays an important role in how your income-related expenses affect your taxes: If the rent is less than 50% of the local rent prices, the rent is only considered partially paid (teilentgeltlich) and therefore, the income-related expenses can only be partially deducted. If the rent exceeds 66% of the local rent prices, there is no doubt that you wish to generate income and you can deduct your income-related expenses in full. If the rent is between 50-66% of the local rent prices, it first needs to be checked whether you intend to generate income - this is called a “total surplus forecast” (Totalüberschussprognose).
According to the accrual principle (Zuflussprinzip), rental income is taxed in the same year that you receive it - this is particularly important if rent or utility costs are paid at a later date. Exception: If you receive rent in your account 10 days before or after a new year, it will be taxed in the year in which it economically belongs. For example, if you receive a rent payment for January 2023 on December 28th of the previous year, it’ll count towards 2023.
Which expenses can I deduct on my tax return?
Any costs you incur through renting can be claimed as income-related expenses (Werbungskosten). These can include acquisition costs, depreciation, running costs such as utilities, interest on debt, renovation costs, and much more.
How high is the tax on rental income?
All taxpayers are granted an annual basic tax-free allowance (Grundfreibetrag) to ensure the minimum subsistence level (Existenzminimum), this allowance also applies to private landlords. Only the income exceeding the allowance is subject to tax. In 2022, the basic tax-free allowance amounts to 10,347 euros, and will be raised to 10,908 euros in 2023. The basic tax-free amount is doubled when filing a joint tax return with your spouse.
The amount of tax you pay on rental income is determined by your individual tax rate (Steuersatz). This is applied to your taxable income (zu versteuerndes Einkommen), which is what remains from your total income minus any deductible costs. If you’re taxed according to tax bracket 2 (taxable income of 10,908-15,787 euros as of 2023), an initial tax rate of 14% applies. The tax rate then increases progressively with each bracket. The top tax rate of 42% applies to a taxable income of 62,810 euros or higher (as of 2023).
When do you have to pay tax on rental income?
Tax for income from renting and leasing must be paid on your annual tax return for the year in which the income was received in your account. However, employees, pensioners, or retirees can benefit from the so-called “compassionate allowance” (Härteausgleich) if their rental income is low:
Additional income (Nebeneinkünfte) of 410 euros per year can be earned without it being subject to tax. Additional income between 410-820 euros is taxed at a reduced rate, and additional income exceeding 820 euros is taxed in full. For example, a rental income of 620 euros per year is deducted from 820 euros, 200 euros then remains tax-free and only the remaining 420 euros is subject to tax.
If you are filing a joint tax return with your spouse, please note that while your additional income is added together, the exemption limit of 420 euros is not doubled.
By the way: As soon as your untaxed additional income exceeds 410 euros per year, you’re required to file a tax return!
Minimum limits for sublets and temporary rentals (Airbnb & co.)
If you temporarily rent out parts of your owner-occupied apartment or house, a somewhat higher exemption limit (Freigrenze) of 520 euros per year applies. This limit applies whether you own the building or if you rent it out yourself and sublet parts of the apartment/home. Tax is not due on rental income of up to 520 euros per year if you are temporarily renting or subletting, but if this limit is exceeded, tax is due on the entire amount. Income-related expenses incurred through renting can also be deducted from this income. These expenses could include, for example, user fees for the rental platform or furniture you’ve purchased for rental purposes.
Renting as a hobby
If you don’t intend to generate income from your rental, it may be classified as a “hobby” (Liebhaberei) by the tax office. If you end up generating income, it doesn’t have to be taxed, but you also cannot claim any losses or income-related expenses in the case of a hobby. Tax offices generally assume that unlimited tenancies are not hobby rentals, the same applies if the rent amounts to at least 66% of other local rent prices.