A person who transfers a property to another person whilst retaining a lifelong right of habitation in rem is not, for tax purposes, engaged in letting. The Hamburg Finance Court clarified this in its judgement of 26 February 2026 and refused to recognise the claimant’s substantial losses from letting and leasing (Ref. 3 K 136/23).
What had happened?
In 2004, the claimant received a two-family house as part of an early settlement of the estate. At the same time, a lifelong right of residence in rem under Section 1093 of the German Civil Code (BGB) over all rooms in the house was entered in the land register in his mother’s name. A right of residence in rem means that the beneficiary may use the building without having to pay rent. The original transfer agreement expressly stipulated this.
About a year later, however, the mother and son did sign a tenancy agreement in which the mother undertook to pay rent. In return, the son took on the ongoing property costs. On the basis of this agreement, he declared income from letting and leasing in his income tax return in the following years.
Following his mother’s death in 2017, the claimant had the property extensively refurbished and renovated. In December 2018, he let the flat on the upper floor to a friend for exactly one month. As early as August 2019, he transferred the property to his adult son free of charge.
The dispute over the 2018 tax year
For the year 2018, the claimant claimed substantial negative income from letting and leasing – that is, losses which he wished to set off against other types of income. The tax office refused to take these into account. The reason given was that there had been no genuine intention to let the property on a long-term basis. The appeal and the legal action were unsuccessful.
The court sees no intention to let the property
The Hamburg Fiscal Court upheld the tax office’s view. For losses arising from letting and leasing to be recognised for tax purposes, it is crucial that the taxpayer intends to generate a net surplus of income in the long term. This was not the case here for several reasons.
- The mother’s use of the property over the years was based on a right of occupation in rem, not on a genuine tenancy agreement. The tenancy agreement concluded retrospectively did not alter this situation for tax purposes.
- The planned switch to furnished short-term lettings would have constituted a new, distinct form of use, for which the intention to let would have had to be demonstrated separately.
- The one-off monthly let to a friend was not sufficient as proof.
- There was a complete lack of any serious efforts to let the property, such as adverts or instructions to estate agents.
- The fact that the house was transferred to the son quickly and free of charge shortly after the alleged expenses were incurred suggested that the property was not intended to generate income on a long-term basis.
What does this mean for property owners?
The judgement is final. An appeal was not allowed. For property owners, this case highlights a typical risk: anyone wishing to claim renovation costs as tax-deductible expenses against rental income must demonstrate credibly that they genuinely intend to let the property on a long-term basis. A formally concluded tenancy agreement or a short-term trial tenancy alone is not sufficient for this purpose. Anyone wishing to claim expenses for tax purposes in a similar situation should seek legal and tax advice at an early stage.
Source: Haufe: Tax
This article was created with the help of AI and has been editorially reviewed.
