Private Sale Transaction for Rooms Rented on a Daily Basis

Sales transactions for real estate held as private assets for which the period between acquisition and sale does not exceed ten years are generally subject to income taxation (Sec. 22 No. 2 in conjunction with Sec. 23 (1) Sentence 1 No. 1 of the German Income Tax Act). Among other things, this does not include real estate that was used exclusively for the taxpayer’s own residential purposes in the period between acquisition and sale. The interpretation of this basic and exemption regulation often leads to disputes between the taxpayer and the tax office, which not seldom end in fiscal court proceedings. For example, in its ruling of July 19, 2022, file no. IX R 20/21, the German Federal Fiscal Court had to clarify the legal question of whether the gain from the sale of a town house constitutes a taxable private sale transaction to the extent that it is attributable to rooms rented to third parties on a daily basis.

In the case in dispute, a married couple acquired a town house with a living space of 150 m² by contract of purchase dated April 12, 2011 for their own use in principle, which the couple sold again by contract dated November 16, 2017. In the years from 2012 to 2017, the couple rented two rooms in the top floor of the house between 12 and 25 days to partly changing fair visitors and generated income from rent and lease. For this purpose, the couple initially concluded a corresponding agency agreement with a third-party company, according to which the respective room was to be made available to the later lessees for their sole use without restriction during the rental period and a stay by the landlord was not permitted. Additional provisions were agreed between the landlord and the lessee in separate written rental and accommodation agreements.

Because of the rooms rented to fair visitors on a daily basis, the tax office assumed, taking into account the area of the top floor of 35 m², a private sale transaction subject to income taxation, as the apartment was not used exclusively for the couple’s own residential purposes to this extent. In the following court proceedings, the tax court of first instance agreed with the couple and considered the use of some rooms of the apartment to be rented to fair visitors on a daily basis to be irrelevant for an exclusive use for own purposes and therefore did not subject the capital gain to taxation. The German Federal Fiscal Court ultimately took a different view, overturned the first-instance ruling and referred it back to the tax court for a different hearing and decision.

According to supreme court rulings, it is generally sufficient for the granting of the requested tax exemption if the taxpayer at least also lives in the building himself; it is harmless if he lives there with members of his family or a third party. A building is also used for the taxpayer’s own residential purposes if the taxpayer only lives there temporarily, provided that the building is available to him as a residence during the remaining time. Therefore, second homes, vacation homes not intended for rental and homes used as part of a double household are also covered.

However, there is no use for the taxpayer’s own residential purposes if the taxpayer lets the apartment to a third party, either for a fee or free of charge, without living there himself at the same time. According to these principles, the temporary renting of some rooms of an apartment excludes the use for own residential purposes, as far as the lessee uses the rented rooms - like in the case in dispute - to the exclusion of the landlord; however, in the case of rooms that may have been left to the lessee for shared use - such as bathroom and corridor - a (minor) use for own residential purposes by the taxpayer remains.

The German legislator does not allow a minor limit in terms of space or time for a harmless rental to third parties, so that even a minor use by third parties is detrimental and the tax exemption is to be denied in this respect. However, the partial rental of some rooms to third parties does not result in the elimination of the exemption for the entire apartment or building, even in accordance with the purpose of the exemption. The standard for determining the proportionate taxable capital gain is then the relation of the living spaces to each other, i.e. the living space used continuously for own residential purposes to the living space temporarily let to third parties for residential purposes.