23 December 2019
While debt interest for a loan to purchase a rented property is tax deductible as income-related expenses, this does not apply to an owner-occupied property. If, for example, a two-family house is purchased in which one apartment is owner-occupied and the other is rented to a third party, the equity capital used can be allocated to the owner-occupied apartment by skilful drafting of the purchase agreement and financing, so that the debt interest paid can be allocated in full or in large part to the rented apartment and reduce the tax burden.
This requires that the purchase price for the two parts of the building be agreed and paid separately in the notarized contract. The purchase price attributable to the rented apartment must be demonstrably paid by means of a separate loan. However, if the entire purchase price is paid in one sum from a bank account to which the loan was previously disbursed, the loan can no longer be exclusively allocated to the rented apartment, according to a ruling of the Federal Fiscal Court, because equity and debt capital have been mixed.
**Tip: This arrangement should be discussed with your tax advisor at an early stage. It is also possible when creating a mixed-use property.
BFH, Urt. v. 12.03.2019, IX R 2/18, BFH/NV 2019, P. 1073