BFH Ruling: No Tax Benefits for “Hobby” Rentals of Luxury Properties

The Federal Finance Court (BFH) of Germany has clarified the tax treatment of losses incurred from renting out luxury properties in a recent judgment. The decision stipulates that such losses cannot simply be offset against other positive incomes. This confirms the ongoing jurisprudence that taxpayers must demonstrate a clear intent to generate income. Otherwise, the rental activity is considered a non-taxable “hobby.”

In the case at hand, a couple had purchased three villas, each with a living area of over 250 square meters, and rented them indefinitely to their adult children. This resulted in annual losses between 172,000 and 216,000 euros, which the couple sought to offset against their other incomes. The tax office rejected this, and their lawsuit was unsuccessful at the financial court.

However, the BFH overturned the financial court’s decision and referred the case back for further review (judgment dated 20.06.2023 – IX R 17/21). The financial court had correctly, but insufficiently, examined the intention to earn income. When renting a property with a living area of more than 250 square meters, taxpayers must prove that the rental is intended to generate a financial surplus. If this cannot be demonstrated due to long-term losses, the rental activity is considered a “hobby,” and losses cannot be offset against other positive incomes.

This judgment reaffirms the BFH’s existing legal view that renting luxury properties does not automatically constitute a taxable activity. Due to the special living value of such properties, the market rent often does not adequately reflect their actual costs, and a cost-covering rental is often not possible. Therefore, it must be regularly proven that a positive economic result can be achieved over a 30-year projection period.

Reference: BFH, Judgment dated 20.06.2023 – IX R 17/21