Debt interest after cessation of rental activity

Published on 18.03.2007

After giving up the rental activity, interest may be payable on loans. If, for example, maintenance expenses (so-called immediately deductible income-related expenses) have been financed with this during the rental phase, the debt interest can be deducted as subsequent income-related expenses in the rental income. Attention: Condition is that it concerns such expenditures which still remain as “residual debt” and not approximately the residual debt “only” from the purchase of the real estate (so-called acquisition and production costs) originates ! The tax authorities distinguish between two groups of cases: If the rental activity is discontinued due to the sale of the rented property, deduction of this debt interest as subsequent income-related expenses is only possible if the proceeds from the sale are not sufficient to repay the debt. But first the loans for the acquisition and production costs must be paid in full ! – If the building is used for own residential purposes following the rental activity or if it is permanently vacant, the debt interest can be deducted as subsequent income-related expenses. However, this only applies to the extent that (fictitious) proceeds that could have been achieved in the event of a sale of the rented property would not have been sufficient to repay the debt. – If the loan is not repaid when the property is sold, but the proceeds of the sale are used to purchase another source of income (e.g. fixed-term deposit), the interest on the loan continues to be deductible. The prerequisites for this are prior agreements with the bank as lender and a comparative calculation of which arrangement really pays off on balance – i.e. not only from a tax point of view.
Source: Fiala, Freiesleben & Weber Law and Patent Attorneys, Auditors and Tax Consultants