Getting the most out of your rental property
Renting out your flat or house can be a great way to boost your income. But doing so comes with various tax implications, and knowing exactly what they are is crucial. You need to know how to properly declare the income, how the income will be taxed and – importantly – how to take advantage of any tax benefits you’re entitled to. myLIFE is here to help you get started.
If you’re in the lucky position of having a property to rent out – perhaps you’ve just moved in with a partner – renting it out can bring in some extra income. But it’s important not to just rush straight out and advertise your place. You need to read up on how rental income is taxed in Luxembourg first. Luckily, myLIFE has put together this handy guide to answer all your questions.
How do I declare my rental income?
If you rent out a property in Luxembourg and receive annual rental income, i.e. the rent received over the tax year, of more than €600, you need to declare it to the tax authorities.
Whether you’re a resident or not, you have to declare the rent in the “Modèle 100” tax return form under “Revenus nets provenant de la location de biens” (net rental property income). Your rental income will then be taxed at the overall tax rate along with any other income.
→ If you’re renting out a property in a different country, you have to declare the rent in Luxembourg if you’re a resident here or treated as one for tax purposes. But the rental income is taxable in the country where the property is located, so you declare it under the “revenus exonérés” (exempt income) column. The tax authorities will then take it into account when calculating the average tax rate to be applied to your total taxable income in Luxembourg.
If your deductible expenses are more than your net rental income, the net negative income is carried over to your other taxable income.
How do I work out how much of the rent is taxable?
Renting out your flat means you can enjoy various tax deductions. To claim them and work out your net taxable rental income, fill out “Annexe 190”, “Revenus de la location de propriétés bâties” (rental income from residential properties) and enter your deductible expenses or “income-related expenses”.
You have to fill in this form in addition to the “Modèle 100” form and send it to whichever tax office covers the area where your property is located. Your net rental income will thus be the rent you receive over the year minus your income-related expenses.
→ If you’re the sole owner of the property being rented or own it with your spouse (married or a jointly taxed partnership), you have to fill out Form 190. If, however, you own the property jointly with taxpayers of a different tax household, you have to fill out Forms 210, “Revenus de la location de propriétés bâties de la communauté” (rental income from jointly owned residential properties), and 200, “Déclaration pour l’établissement en commun des revenus d’entreprises collectives et de copropriétés” (declaration establishing income from joint ventures and co-owned property).
Remember: If your deductible expenses are more than your net rental income, the net negative income (rental loss) is carried over to your other taxable income (salary, pensions, investment income, etc.).
Useful info: Since 2017, anyone renting out their property to an accredited social housing body has been eligible for an exemption for 50% of their net rental income.
What income-related expenses can I deduct from my rental income?
Deductible income-related expenses are any out-of-pocket costs you incur to earn, guarantee or retain your rental income. Examples include property depreciation, maintenance and repair costs, fees not covered by the tenant, debit interest and all other deductible charges.
You can deduct the depreciation of your property from your taxable income throughout the term of the lease.
- Property depreciation
Property depreciation accounts for the deterioration of your property over time. You can deduct a portion of this drop in value from your taxable income throughout the term of the lease. Here’s how:
First, work out the depreciation base, i.e. the property purchase price minus the cost of the land (non-depreciable). Then add on the legal fees you paid to buy the property (not including land costs) and any investment costs* you incurred once the purchase was complete. If you don’t know the land cost, deduct 20% from the total price.
* Investment costs are for renovations or work that greatly increase the value of the property – converting a commercial property into housing, adding a conservatory, converting the loft, etc. They should in theory come to more than 20% of the purchase price and can be depreciated separately.
→ If you acquired your property at no cost (for example through inheritance), the tax authorities will use the purchase price paid by the previous owner as the depreciation base (any inheritance tax is not added to the purchase price, so it is not deductible). If the property was bought before 1941, the depreciation base can be set at three times the property’s assessed value.
Example: you bought a flat in 2015 for €500,000 and spent €20,000 on legal fees. Since the flat was built before 2011, meaning that the deed of sale does not specify the land cost, the 20% flat rate will apply.
The depreciation base is therefore €416,000: (€500,000 + €20,000) x 80%.
The rate to be applied to the depreciation base depends on the age of your property on 1 January of the tax year in question.
> Housing completed before 1 January 2021*: If your property was built less than 6 years ago, the depreciation rate is 6%. If your property was built between 6 and 60 years ago, the rate is 2%. And if your property is even older, the rate is 3%. This rule also applies to any investment costs for renovating an old property where the work was completed before 1 January 2021 and the costs come to more than 20% of the purchase price or cost price of the building.
> Housing completed after 1 January 2021*: The law has now changed – if your property was completed within the last 5 years, the depreciation rate is 4% plus an additional allowance of 1% of the purchase value (capped at €10,000; doubled for joint taxation situations). The same rates as above apply where your property was built within the last 60 years (2%) or earlier (3%). You don’t have to refer to this “special property allowance” in Annèxe 190; the tax authority will apply it as part of Form 100.
→ The depreciation rate for a property bought before 1941 is 2.5%.
* Based on date of final acceptance.
NB: Any properties you rent out for non-residential purposes (for example businesses) are subject to different depreciation rates.
Going back to our example above, let’s say the flat was built more than 6 years ago and you bought it before January 2021. In that case, a 2% depreciation rate applies, resulting in a deductible depreciation of €8,320/year (€416,000 x 2%).
However, if you’d bought a new-build flat in 2019 for the same price, when renting it out you’d have been able to apply a depreciation of 6% of the value for 6 years, i.e. €24,960 (€416,000 x 6%).
Useful info: If you’ve completed any sustainable home renovations to a rental property within the 9 years before 1 January of the tax year in question, you can apply a 6% depreciation rate to the investment costs incurred.
Maintenance and repair costs are deductible in the year they are incurred.
- Maintenance and repair costs
If you wanted to do some work to your flat before renting it out (repainting, boiler servicing, roof repairs, etc.), you can deduct some of the costs involved from your rental income.
Useful info: Maintenance and repair costs are deductible in the year they are incurred. If these costs come to more than half the rent you receive in a year, you can ask the tax authorities to spread them equally over 2 to 5 years.
- Various fees not covered by the tenant
If you’re liable for any charges like water, electricity, heating, fire insurance or third-party liability, or incur any costs between two lease terms, you can also deduct these from your taxable rental income.
|Flat rate deduction of income-related expenses
Instead of deducting your actual income-related expenses for maintenance and repairs, depreciation and various fees not reimbursed by the tenant, you might be able to use a flat-rate deduction of 35% from the gross rent received, capped at €2,700 per property per year. To be eligible, your rental property must have been completed more than 15 years before 1 January of the tax year in question. And keep in mind that you can only change to the flat-rate deduction once every 15 years.
- Debit interest
You can deduct any interest you pay on the mortgage of your rental property, along with any financing costs – application fees, bank charges, etc. – with no upper limit. This is different from interest for your main residence, which is subject to a cap. Your flat in our example still has a mortgage, so you’ll be able to deduct all the interest you pay on your loan.
- Miscellaneous deductible expenses
Lastly, the tax authorities also allow some other expenses to be deducted, such as property tax, municipal taxes, ongoing annuities and charges, and management fees. If you have any of these expenses, you can find out all the details in Form 190 or Form 210.
We hope you now have a clearer idea of your tax obligations and the benefits you can take advantage of when renting out your property. We would also advise you to get in touch with a tax adviser, who will be able to optimise your tax dealings.
For now, start thinking about things to bear in mind before renting out your property, how to set the rent for your flat and how to choose a tenant wisely.