Renting to related parties

When renting to related parties, various aspects must be taken into account when setting the rent to avoid tax consequences.

A rent below the market value represents a preferential rent, which initially appears advantageous for both sides: the renter benefits from a favourable rent and the owner saves taxes due to the lower rental income. If the preferential rent is very low, however, the tax authorities may assume that tax evasion is possible. According to the practice of the Federal Supreme Court, tax avoidance is assumed if the rent is lower than half of the imputed rental value relevant for direct federal tax. As a result, the difference between rental income and imputed rental value is offset against the owner's taxable income. In the case of multi-family houses in which identical apartments are rented to related parties at a preferential rent and to third parties at market prices, the authorities may use the market price as a benchmark because of the direct possibility of comparison. In this constellation, the preferential rent should not be less than half of the market rent, otherwise the entire imputed rental value is taxed. Through the correction of the tax office, the owner pays tax on investment income that he has not actually earned.

Objective reasons for a too low rent should be explained in the declaration to avoid offsetting. Should the landlord share the use of the property he rents at a preferential rent (e.g. as a vacation home), the tax office may suspect a feigned tenancy. In this case the full imputed rental value is taxed. Depending on the relationship with the owner, there is a risk of gift taxes for the renter, since the monetary advantage of the preferential rent (difference between preferential rent and imputed rental value or market rent) could qualify as a gift. Despite the ruling of the Federal Supreme Court, there are different cantonal regulations regarding the offsetting of the income from assets in the case of a preferential rent. A close look at the respective tax law is essential when determining the rent.

References: 
Raphael Kissling, Partner von TreuVision 
TreuVision supports small and medium-sized enterprises (SME) in bookkeeping, accounting and financial management.