The holiday home as an investment property: What needs to be considered from a tax perspective?

Holiday homes in holiday resorts are interesting investments. However, in order for them to be let optimally, the holiday properties should meet the requirements of the tenants. Holiday homes in prime locations in tourist resorts, for example, are much easier to let than homes far removed from any infrastructure. Properties with sea view or in the Alps where you can ski bring higher income. Even the furnishings of the holiday home have an impact on its rentability. A fully equipped kitchen and beds already made upon arrival are services that holidaymakers appreciate. If there is a bakery just around the corner and parking spaces in front of the house, potential tenants are more likely to choose this holiday home. If the property owner does not live near the holiday property, he or she needs a property manager. After all, guests want to be welcomed on arrival. Once the guests have left, you also need staff to carry out a final cleaning. Many holiday resorts have agencies or property management companies for this purpose, but they come at a price. A contract of this kind with an agent for year-round letting without owner-occupation is helpful in proving the intention to make a profit to the tax office and thus in turn to claim the brokerage costs for tax purposes. 

Rental income generally falls under the category of private asset management. Accordingly, the letting of holiday homes does not initially require any commercial activity. This applies in particular if the owner uses the holiday home himself for much of the year. This means that income up to a certain amount must be declared exclusively via income tax returns. Annex V is used for this purpose, in which all income from letting and leasing must be reported to the tax office. The tax amount depends on the individual total income. In some cases, it may be worthwhile to register a so-called small business. Up to a turnover of 17,500 euros per year, small business owners are exempt from VAT. This can simplify letting and tax returns.

If the rent increases over time and thus exceeds this value, the property owner's status automatically changes to that of an ordinary commercial enterprise. On the other hand, this means that VAT is payable. If you generate less income than the tax-exempt amount, you will only be classified as a business if you let your holiday home on a daily basis in the form of a hotel along with the corresponding services. In the case of a commercial rental, VAT is also applicable. Even for occasional owner-occupation of the holiday home, many places charge a so-called second home tax. This tax can vary considerably from municipality to municipality and is usually between five and 18 per cent of the annual net rent. The following types of tax may, but need not, apply to every holiday home landlord:

• Income tax in the context of the management of private assets

• Business tax in the case of letting with the intention of making a profit above the tax-free amount

• Second home tax for (partial) owner-occupation in many municipalities

• Value added tax for commercial letting 

If turnover does not exceed 24,500 euros per year, there is usually no obligation to register a business. An exception is the rental by the day with comprehensive service, which is indicative of a hotel business. If the rental income exceeds the tax-free threshold, the tax authorities assume commercial activity. This means that a business must be registered and business tax must be paid accordingly. There is no obligation to register a business for annual rental income below this amount. Nevertheless, a business registration can even be advantageous under certain conditions. 

Up to an amount of 17,500 euros per year, the property owner has the choice of whether or not to charge VAT. If you register as a small business, VAT is not an issue. But if you want to make a pre-tax deduction, you must register a business. In this case, the renovation costs and the expenses for managing the flat are tax-deductible. Added to this is the difference from the invoices for the expenses. The input tax usually amounts to 19 per cent. Letting, on the other hand, is usually charged at the reduced tax rate of 7 per cent. This can be a good way for the investor to reduce the cost of the holiday home. However, the mere registration of a business is not sufficient to prove the legitimacy of the business and to be able to deduct expenses. A business registration does not automatically trigger business tax, as the tax office allows a tax-free income of 24,500 euros for partnerships. However, this exemption does not apply to registered companies.

If owners rent out their holiday home by the week, this falls under private asset management. The income is to be filed and taxed with the income tax return. This applies to any number of holiday properties in various cities and also to occasional owner-occupation. However, deducting possible expenses is more difficult. Because to do this, it is necessary to make a profit. The tax office usually no longer recognises holiday property without profit as a depreciable asset. Classifying it as a mere sideline does not allow for any expense deduction. Thus, the accumulation of wealth through the purchase and rental of holiday homes as investment properties is easy to classify for tax purposes. The law states that intensive special services may constitute commercial letting. But what does the legislator mean by this? Made-up beds on arrival, the weekly changing of towels or the delivery of bread rolls to the door in the morning are not yet part of this. Even if the landlord organises the transfer from the train station for the guests or charges for the final cleaning, it is still a mere activity as an asset manager. 

The situation is different when landlords advertise and let on a daily basis, i.e. offer hotel-like services. This includes, for example, services such as a full breakfast in the common room or a manned reception for check-in without advance notice. Under certain circumstances, the tax office will assume a commercial letting if a local holiday service organisation specialising in personnel-intensive services is commissioned. Another indication of commercial letting is if the holiday apartment is located in a building where most of the other apartments are available for short-term letting. Classification as a commercial activity may occur from as little as one residential unit.

On the other hand, the letting of five holiday homes may still be considered as management of private assets. In addition to an annual turnover above the tax-free amount, it is therefore mainly the hotel-like letting that triggers a classification as commercial activity. However, commercial letting also brings advantages. It means that all expenses for staff, placement agency, renovation or purchases are tax-deductible. If you want to register a business to allow for this depreciation, you must make sure that you achieve the minimum prescribed number of overnight stays.

For many, an investment in a dream holiday home is particularly worthwhile because of the possibility of owner-occupation. At the same time, additional letting is intended to bring attractive returns. There are special considerations to be taken into account in order for the holiday home to be of interest for tax purposes. Expenses are only tax-deductible if the intention to generate a profit can be proven. The tax office determines this on the basis of a minimum number of paid overnight stays. For this purpose, the authorities assume a rental period that is customary in the locality. This varies in each destination. For example, the required overnight stays on the island of Sylt differ depending on which of the three regions the holiday property is located in. If at least 75 per cent of the average is exceeded, your expenses are generally deductible. If the letting rate is lower than this quota, the tax authorities will quickly doubt the intention to make a profit despite the registration of a business.

In case of doubt, the tax office will request an income forecast. This is a statement of costs and projected revenues over the next 30 years. Therein, the property owner must prove that he can and wants to make a profit on an ongoing basis. This is the only way to prove that you are not doing it as a mere sideline. In the case of mixed use, the owner generally determines the type and duration of owner-occupied use. However, it is advantageous to declare a certain period of time for own use. By establishing owner-occupancy, the investor determines the maximum letting period and thus the percentage of deductible expenses. For example, if you use your holiday home yourself for five weeks per year, the letting period is 90 per cent, which is a high rate for deducting expenses. If not specified, the legislator assumes 50 percent owner-occupation.

It might seem worthwhile to let your condo near the tourist attractions in Berlin to city travellers, for example. This is because short-term rentals are often more appealing to landlords than long-term rentals. The wear and tear are lower and the rent is higher. But is that allowed even though there is a shortage of living space everywhere? To answer this question, you should first take a closer look at the declaration of partition and the rules and regulations of the owners' association. It is often sufficient if an express prohibition of the use of an apartment as a holiday home is stated therein. Likewise, a resolution of the owners' association on this subject is binding. If there is no regulation on the subject of holiday property, this is basically equivalent to a contractual permission. This is what the Federal Supreme Court ruled in 2010 under the case number AZ V ZR 72/09. In the specific case, however, there was express permission in the declaration of partition. In addition, the judges emphasised that the other residents must not be encouraged by the letting as a holiday home. In this respect, it is advisable to openly discuss and clarify the short-term rental in the spirit of good neighbourliness. 

A unique holiday flat with a view of the Baltic Sea or the Alps is a plus for every holiday. As an investment, the holiday property should also yield a monetary benefit. While exclusively renting out a holiday home allows for the deduction of all expenses and thus brings tax advantages, there are a few things to consider when it comes to mixed use. But with a thoughtful strategy and a fixed period of owner-occupation, the tax hurdles are easy to circumnavigate. When buying a holiday home as an investment property, investors should therefore clarify in detail with their tax advisor how its planned use will bring the best tax benefits. Whether private asset management or a commercial enterprise is the best way to let a holiday home is always dependent on the specific circumstances and the personal tax situation.