Can I rent out a private apartment as a normalized sole trader (s.p.) and is it worth it?
Personal income tax on rental income is calculated and paid from the tax base at the rate of 27.5% and represents the final tax, whereby the tax base is reduced by 15% for normalized costs on income from property lease (effective tax rate is therefore 23.375%). Landlords may, at their discretion, claim in their tax returns the actual costs of maintaining the property instead of the normalized costs, if they pay the property costs themselves during the term of the lease. This involves the costs necessary to maintain the usable value of the property. Actual maintenance costs are recognized based on invoices submitted by the landlord for this purpose to FURS. However, in practice, claiming costs is more an exception than the rule. This is due in part to a lack of awareness of this option.
Given the rather discouraging tax environment regarding the lease of real estate, apartment owners often choose to rent out “illegally” (i.e. not to declare rental income), which can result in not just a fine (and subsequent payment of the tax), but also difficulties in exercising rights under the lease agreement such as e.g. termination of the lease agreement and eviction of a tenant in arrears.
Recently, therefore, more and more landlords have switched tack and started renting out private apartments as part of a registered activity (renting and operating of own or leased real estate), which they carry on as a so-called “afternoon s.p.” (sole trader). Some landlords have gone down this route based on a mathematical calculation of the proceeds taking into account earnings, costs and taxes. If the owner rents out an apartment as a private individual, for a monthly rent of e.g. EUR 750, and generates EUR 9,000 of rental income per year, he will have to pay approx. EUR 2,100 of that in personal income tax, which represents the total cost to the landlord. However, if he rents out the same property for the same amount as an s.p. then total annual costs amount to approx. EUR 1,260. The landlord will have to pay approx. EUR 360 of that in personal income tax on EUR 9,000 in rental income (80% of normalized expenses = EUR 7,200, tax base = EUR 1,800, 20% of the final tax / personal income tax is paid from the tax base = EUR 360), in addition to personal income tax. However, he will also have to pay health and pension insurance contributions of approx. EUR 75 per month, totaling approx. EUR 900 over the year.
However, renting out a property through an s.p. is by no means risk-free. Namely, uncertainty remains around whether or not landlords are required to transfer the property to their s.p. (transfer of real estate from the household to the person’s company, to fixed assets), as no clear guidelines have been published by FURS in this regard. Please note that the transfer of real estate from the household to a person’s company is usually a taxable transaction (capital gains tax), unless the property was acquired before the establishment of the s.p.
Additional tax effects may arise when activities are wound down. If it transpires that the property must be transferred to the s.p. and if, post-transfer, the sole trader ceases to carry on his activity and has to transfer the property from the company back to his “private sphere”, he will have to pay income tax on the disposal of assets (the difference between the market and carrying value of the property). Once the s.p. is closed, personal income tax is payable only in the event that the property was transferred when the s.p. began trading or later and was owned by the landlord prior to establishment of the s.p. If the property was acquired after trading commenced, personal income tax is payable.
Therefore, renting out a private apartment as a normalized s.p. does not guarantee that the landlord will “profit” in the long run, as this depends on several factors, not least the numerous tax uncertainties surrounding this type of leasing, which could be partially put to rest under new tax legislation due to be passed shortly. For landlords contemplating renting out property as an s.p. it is definitely worthwhile establishing the s.p. only after they have purchased the property as opposed to beforehand.
Author: Dean Premec, Attorney-at-law
