From landlord to tax evader? These are pitfalls.

Landlords beware: How to avoid unintentional mistakes on your tax return!

This article will give you an insight into how landlords can unintentionally become tax evaders. As the tax regulations in the area of letting are very complex, misunderstandings can easily arise and even well-intentioned actions can lead to serious consequences such as criminal tax proceedings. It is therefore important to recognise the risks as a landlord and understand how to act in such a case.

What mistakes can a landlord make when filing a tax return?   

In recent years, the courts have increasingly dealt with cases of tax evasion in connection with lettings. Authorities are increasingly taking action against landlords who do not declare their income correctly. In particular, the letting of properties via online platforms such as Airbnb has become the focus of tax investigations.

When it comes to rental income from property, it is very important that landlords declare their income correctly and transparently. Accidental errors or deliberate failure to declare income can have tax consequences. Here are some pitfalls:

Failure to declare rental income

A landlord who does not declare or only partially declares his rental income in his tax return could be suspected of tax evasion. This could happen, for example, if the landlord has not correctly recorded cash payments from tenants or has not declared income from subletting. Another example is the failure to declare reimbursements of the tenant’s operating costs.

False declaration of rental income

A landlord who allocates rental income to the wrong tax period – for example by not observing the accrual principle – is also making incorrect statements in their tax return.

Late submission of tax returns with rental income

Late submission of a tax return can constitute the offence of tax evasion by omission.

False information on costs

If a landlord deliberately overstates costs in their tax return in order to reduce their tax bill, this could also be considered tax evasion. For example, the following costs could be falsely declared:

• Mixing private expenses and expenses relating to the rental property of maintenance or renovation costs,
• Excessive depreciation,
• immediate claiming of maintenance costs instead of annual amortisation,
• Full deduction of income-related expenses despite the flat being let for residential purposes for less than 50% of the local market rent.

Non-payment of VAT for short-term lets or garage rentals

Short-term lettings and the letting of a garage separately from a flat are subject to VAT. Landlords who generate rental income that is subject to VAT must declare this correctly in their advance VAT return and pay the VAT accordingly. If a landlord does not pay VAT or makes false declarations in order to avoid VAT, this constitutes tax evasion.

Of course, the small business regulations must also be observed here, which do not result in a VAT liability for a certain amount of turnover (less than € 22,000 in the previous year and no more than € 50,000 turnover expected in the new year). However, if you only rent out garages and at the same time run a sole proprietorship with income subject to VAT, you can no longer fall back on the small business regulation. Under VAT law, all income received by you personally is totalled.

Short-term letting via internet portals

As a rule, income from short-term rentals is also subject to income tax and possibly VAT. Anyone who has not yet declared this income is exposed to a high risk of detection. In mid-2023, the Hamburg Tax Investigation Office received a new data set from internet portals and sent it to the federal states, which is currently being analysed. It can be assumed that criminal tax investigation proceedings will be initiated in this context in the near future.

Short-term letting and offering additional services

If you let your property on a short-term basis and, in addition to renting out living space, also offer “non-standard special services”, e.g. the provision of bed linen or towels, the preparation of breakfast or similar, you even run the risk of becoming a commercial tenant – with the consequence that this is no longer income from letting and leasing, but income from commercial operations. It is not the recognition as rental income that plays a role here, but the actual facts. This turns what were originally private assets into business assets.

Letting abroad

Letting property abroad poses a complex challenge in terms of tax declaration obligations. The issue of double taxation is particularly complex. If a property located abroad is rented out, this can lead to tax obligations both in the country where the property is located and in the landlord’s home country. Such situations are often complicated and can result in incorrect tax returns. It is a common misconception that the taxation of rental income in the country where the property is located also includes the tax obligations in the home country. Even if rental income is tax-free in Germany due to double taxation agreements, under certain circumstances it can affect the progression proviso and must therefore be declared correctly in the German tax return.

In the recent past, many countries have intensified the exchange of information on cross-border financial transactions. This increases the transparency of income from the rental of foreign real estate and increases the risk of fulfilling the requirements for tax evasion.

What should landlords know about tax evasion and voluntary disclosure?

What are the penalties for tax evasion? What is the difference between wilful and negligent tax evasion? What options are there for taking action?

We have answered all these questions in the detailed article “Tax evasion and voluntary disclosure – what you need to know”.

Conclusion

It is important that every landlord fulfils their tax obligations carefully and conscientiously and always keeps an eye on the risks of criminal tax law through continuous training or professional advice.

A voluntary disclosure should never be made hastily and on one’s own initiative without qualified tax law advice. If you make mistakes here, you risk losing the effect of a criminal offence! The following applies in particular: A voluntary disclosure is not defined solely by the fact that it is labelled as such. Any letter to the tax office that discloses new facts could potentially be interpreted as a voluntary disclosure.