Parental purchase: What taxation?
A change in the law has limited the tax benefits of parenting, but if you run another business and have saved profits in the company scheme, parenting can still be a good way to provide housing for young people.
When you buy an owner-occupied property to rent it out to your child and don't live in it yourself, it's called a parental purchase. Actually, the rules cover what's called 'letting to related parties' - that is, letting to your or your spouse's grandparents, parents, children and grandchildren and their spouses.
Choose between three types of taxation
Rental of real estate is considered an independent business. The company's profit is calculated as rental income less operating expenses - including any maintenance. As an owner, you can choose to calculate the taxable income from your business according to the rules of either the company scheme, the capital return scheme or the general taxation rules (Personal Tax Act).
You decide which method you want to use when filling out the information form (tax return).
Enterprise scheme: This scheme offers some tax benefits for businesses, but in 2021 and later income years it is usually only relevant if you run another business in addition to the parent purchase. For example, you can use saved funds for the parent purchase and you still have the option to save any profits in the scheme.
Return of capital scheme: Here, part of the company's profits can be taxed as capital income, but since the parental purchase is not included in the return of capital basis, the scheme will result in the same taxation as under the ordinary rules. The scheme is therefore only relevant if you run another business in addition to the parental purchase. The rate for 2023 is 3%.
General tax rules: If you don't opt for taxation under the company scheme or the capital return scheme, you will be taxed according to the ordinary tax rules. This means that the profit from the rental is taxed as personal income, i.e. in the same way as salary income. You must also pay labor market contributions. You can deduct the interest expenses related to the rental in the same way as your other interest expenses, i.e. as a deduction from your capital income.
Interest must be deducted from capital income
Previously, by using the company scheme, you could deduct the interest in the company's result and thus directly in the personal income, but this is no longer possible from January 1, 2021.
Now a technical calculation is made (a so-called interest correction). This means that the interest expenses related to the purchase of the property will be deducted from the capital income. So, if your only business is a parental purchase, all interest expenses can no longer be deducted from your personal income.
The value of the interest deduction decreases
With the changed rules, the deductible value of interest has fallen from around 56% to around 33% if you pay top tax. For example, if there is DKK 30,000 in interest related to the parental purchase, the change costs approximately DKK 6,900 in additional tax. This corresponds to 23% of the interest expenses of DKK 30,000.
More information
You can read more about the tax rules for parental purchases on Skats website.
If you need advice or practical assistance, you are welcome to contact inforevision's tax department. Read more about us and our services here.
