Letting to relatives: how low the rent can be

Romolo Marini · 2026-10-14

Your daughter is starting university, and rents in the university town are high. So you buy a small flat there, let it to your child and deduct the expenses for tax purposes. That is the idea, at least. Naturally, you do not want to charge your daughter as much rent as you would an unrelated tenant.

This is precisely where the figures either work or fall apart. The tax office accepts discounted rents between relatives, but only down to a clear threshold. Below that, it reduces your deductible income-related expenses, and a discount of a few hundred euros can suddenly cost thousands.

We explain the thresholds, show what counts as the local market rent and calculate three rental scenarios for one flat.

01The three bands: 66%, 50% and below

A tiered rule has applied to residential lettings since 2021. It is set out in § 21 Abs. 2 EStG; the middle band derives from the explanatory memorandum to the Annual Tax Act 2020 and administrative practice.

The apportionment is straightforward. If your child pays 45% of the local market rent, you may deduct only 45% of your expenses. You still pay tax on the full rental income.

What the total surplus forecast means

Between 50% and 66%, the tax office looks ahead. It estimates whether the letting will generate an overall surplus over a period of generally 30 years: in other words, whether income will exceed deductible income-related expenses. Tax professionals refer to letting without this intention as Liebhaberei, an activity pursued without an intention to make a profit. For a financed flat with high interest costs in the early years, the forecast is often negative if the rent is low. Expenses are then apportioned just as they are below 50%.

If you want to avoid this assessment, set the rent comfortably above 66%.

02What counts as the local market rent

The most common calculation error occurs at the benchmark stage. The Federal Fiscal Court has ruled that the local market rent is the rent including service charges (Warmmiete): the basic rent (Kaltmiete) plus costs recoverable under the German Operating Costs Ordinance (BFH, judgment of 10.05.2016, IX R 44/15). Heating, water, property tax and refuse collection are therefore included.

For the basic rent, use the municipality’s rent index. Where none exists, comparable rents on property portals, a valuation report or information from the local property valuation committee can help. Where the rent index gives a range, administrative practice allows the tax office to regard any value within that range as the local market rent (R 21.3 EStR). Using a figure at the lower end is therefore generally defensible.

Comparing only the basic rent can easily lead you astray. A basic rent of €450 plus €150 in service charges gives a total rent of €600, or 68% of the local market rent including service charges. Comparing basic rents alone would give only 64%. Conversely, if you do not reconcile service charges and charge only a low flat rate, you reduce the total rent and may fall below the threshold.

03The arm’s-length test: the agreement must be genuine

Meeting the threshold alone is not enough. The tax office also checks whether the tenancy agreement was entered into and is implemented as it would be between two unrelated parties. Tax lawyers call this the arm’s-length test (Fremdvergleich; H 21.4 EStH). If it fails, no income-related expenses are deductible, regardless of how high the rent is.

One concern often arises where children are involved. Can rent be paid out of maintenance that the parents transfer anyway? Yes. The Federal Fiscal Court ruled that a tenancy agreement with a child entitled to maintenance is not abusive merely because the child pays the rent out of cash maintenance payments (BFH, judgment of 19.10.1999, IX R 39/99). Maintenance and rent are two separate transactions. What matters is that both payments actually take place.

04Worked example: what a rent discount costs after tax

The Berger family buys a two-room flat for their daughter, who is at university. The local market rent is €700 excluding service charges, plus €180 in recoverable costs. The parents are married and have combined taxable income of €120,000. The names are fictional, and the figures are a worked example, not a forecast.

Annual expenses comprise €4,000 in depreciation, €7,000 in interest, €600 in non-recoverable costs and €2,160 in recoverable costs. We compare three rent levels with letting to an unrelated tenant.

Scenario A illustrates the key point. The daughter pays €280 less per month than an unrelated tenant, or €3,360 less per year. After tax, however, the parents are only €2,092 worse off, because the tax office shares part of the cost through the higher loss.

In scenario C, the reverse is true. The discount is €5,760 per year, and because only 45% of expenses now count, it costs €6,426 after tax. More than the discount itself. Scenario B depends on the forecast. If it is positive, the result after tax is −€818; if it is negative, it is −€3,060.

05Special cases

Parents as tenants. The same rule applies to parents as to children. Care is needed if parents transfer their own flat to their children and then rent it back. In these cases, the tax office examines very closely whether the arrangement constitutes an abuse of legal structuring. This is a matter for a tax adviser.

Furnished flat. If you let a furnished property, a furniture surcharge forms part of the local market rent. Not charging it reduces your percentage and may take you below the threshold.

Vacancy and personal use. If the flat stands empty after your child moves out and is genuinely offered on the rental market, expenses remain deductible. If you move in yourself, the letting ends and income-related expenses cease to be deductible from that point onwards.

Annual assessment. Whether the 66% threshold has been met is reassessed every year. If comparable rents in the town rise, a rent that was previously sufficient may fall below the threshold.

06Risks and limitations

Tenancy law also applies within families. Your child is a normal tenant with full protection against termination. If you later want to sell the flat or use it yourself, the usual notice periods and grounds for termination apply. Family disputes do not make this any easier.

Rent increases remain necessary. To stay above 66%, you need to raise the rent occasionally, following the normal rules for rent increases. Many parents shy away from this, and the rent slips below the threshold unnoticed.

Property costs. Interest, maintenance, vacancy after your child moves out and refinancing at higher interest rates all need to be included in your planning. As scenario A shows, even a flat let in full compliance with the rules often needs financial support before tax in the early years.

Scrutiny by the tax office. Agreements between relatives are checked more frequently than others. Keep the agreement, bank statements, annual service charge statements and evidence of the local market rent.

07Further reading

• Tax on rental income
• Completing Anlage V
• Deductible expenses for rental property
• Local comparable rent
• Rent increases: rules and the cap on increases
• Calculator: tax on rental income
• Glossary: deductible expenses for rental property
• Glossary: intention to let

08Sources

All sources accessed on 14 October 2026.

• § 21 EStG (Abs. 2, residential letting at a reduced rent), § 32a EStG
• Income Tax Guidelines R 21.3 and guidance H 21.4 (agreements between relatives)
• BFH, judgment of 10.05.2016, IX R 44/15 (local market rent as rent including service charges), as cited by Haufe
• BFH, judgment of 19.10.1999, IX R 39/99 (letting to a child entitled to maintenance)
• Federal Ministry of Finance circular of 08.10.2004, IV C 3 - S 2253 - 91/04 (intention to generate income from letting)
• Worked examples: own calculations using the 2026 tax rates, as at 14 October 2026

Note: This guide provides general information and is not a substitute for tax or legal advice on your individual circumstances. All figures are illustrative calculations with disclosed assumptions, as at 14 October 2026.