Many young people leaving the parental nest face an overwhelming rental market where they can quickly spend a fortune on various housing portals. They fumble around the rental market, making calls, and it all feels like a never-ending cycle.

This is why parental purchases are a popular choice if you, as a parent, want to help your child secure a permanent roof over their head. This is especially true in major university cities, where there is high demand for most rental properties.  

However, making a parental purchase is not the same as buying ingredients for lasagna at the supermarket. There are rules for parental purchases that must be followed.

What exactly is a parental purchase?

Many automatically think that a parental purchase involves parents buying a home to rent out to their children. That is not wrong, and it is indeed the most common form.

But if we put on our legal glasses, we can broaden the understanding of the parental purchase concept.  

The tax authorities define property rental as a parental purchase if you rent to a "close relative." In addition to your own child, a close relative can also be:

1. Your grandparents and their spouses
2. Your parents and potentially their spouses
3. Your children's spouses
4. Or your grandchildren and their spouses

So, if you rent out or buy a property to rent to any of the above parties, your rental activity is defined as a parental purchase or simply "rental to a close relative."

Buying a home for, say, your parents is also called a reverse parental purchase. Once you have made a parental purchase and start renting to your child, there are rules that are good to know and follow. We will go through them below.

Parental purchase rules – here is what you need to be aware of

There is a whole range of things and rules for parental purchases that you need to be aware of when renting to a close relative. We will cover these in the following sections so you can avoid going down untrodden paths before you make a parental purchase.

You are considered a self-employed business owner

Now, let's put our legal glasses back on.

Beyond the legal definition of a "parent purchase" as renting to a "related party," you are also considered a business owner if you rent a property to a child or parent. This is because renting out property is a commercial activity, as you receive rental income from your tenant.

Not everyone is aware of this before they embark on a parent purchase.

One of the main reasons it is important to know the rules for parent purchases is the fact that your rental activity is considered a business by the Danish Tax Agency (Skat).  

Running a business might sound like a handful, but it doesn't have to be. We are here to help you find answers to your questions.

Rules for parent purchases and tax

Some of the most important rules to be aware of regarding parent purchases are the tax regulations. You are used to your bank, union, and others reporting taxable information for you. However, when it comes to your parent purchase and taxes, you are the only one who truly knows how much money is coming in and going out.

You must, for example, decide which tax scheme to use and keep track of which expenses you can deduct, such as apartment maintenance. Finally, you also need to know which tax forms to enter your expenses into.

In other words, you need to prepare a tax statement for your rental activity. It must consist of your income and expenses related to your parent purchase for a given tax year. Your tax return will be expanded with a few fields you may not have seen before.

Stop worrying about parent purchase rules and taxes—calculate it with Reportability

Parent purchase rules and taxes can be both complicated and difficult. Are you unsure about the tax calculation, which expenses you can deduct, or which fields to fill in on your tax return?

Then Reportability might be for you. We have created an online tool for parent purchasers and other landlords like you that calculates tax automatically and helps you comply with all requirements and rules for parent purchases.

The tool guides you through 5 quick and simple steps, and once you have entered your income and expenses, the tool finds all your deductions, calculates your tax, and tells you exactly what to enter in your tax return.

If you need help along the way, you can always message our accountants in the chat.

Create a free account and try the tool.

The tax statement

As a parent purchaser, you are a self-employed business owner, which means you must inform the tax authorities of the income and expenses you have had from your parent purchase during a tax year.

For example, you must report your income from rent and any payments for electricity, water, and heating to the tax authorities. Your expenses include property taxes, maintenance costs, and insurance.

When it is time to settle the accounts and report to the tax authorities, you need to gather all your figures.

You have 3 different options for your reporting. You can choose between three tax schemes, which are:

1. Personal Tax Act
2. Capital Return Scheme
3. Business Tax Scheme

These tax schemes offer various benefits, which we will briefly review.

The Personal Tax Act is the simplest tax method to use. It is also the first solution you encounter at the Danish Tax Agency, so you are likely already familiar with it.

You pay tax on rental income and can deduct expenses related to the operation of the rental property. To get the best possible overview when it is time to settle your accounts, it can be advantageous to set up an account dedicated solely to your rental activities. All payments in and out related to the rental should go through this account, making it easy to keep track of your overall situation.

In the capital return scheme, a capital return is calculated, which is taxed at a lower rate. However, following an adjustment to the capital return basis for parental purchases, the capital return will in most cases be 0, because the purchase price of the parental property is no longer included in the basis for a capital return.

In the business tax scheme, parental buyers have previously enjoyed significant tax advantages. However, under current legislation, it is only possible to retain profits from the parental property at a low tax rate of 22%. This can be an advantage if, for example, you pay the top-bracket tax rate.

You can read more about the tax schemes for parental purchases and the associated rules by clicking the button below.

How is the rent determined?

Even though a parental purchase is typically made out of love and a desire to help your child have a good, affordable place to live, this does not mean you can simply set an artificially low rent.

This is because there is a "market rent" that the Danish Tax Agency uses to assess whether you have set the rent at a level that reflects the market and does not distort competition.

But what is the market rent?

The market rent is the amount you would be able to charge a tenant under normal circumstances, where you are not renting to a close relative.

You can determine the appropriate rent by comparing it to other rental properties in the same area and of the same standard. You can do this by researching the market on housing portals or other websites where landlords promote rental properties.

If you set the rent below the market rate, the Danish Tax Agency will tax the difference between the rent you have set and the rent they believe you should be charging.

This is obviously unfortunate, as you will end up paying tax on money you have not received. Therefore, it makes the most sense to set a rent that aligns with the market rate.

The Danish Tax Agency also considers a low rent to be a "gift." If this gift exceeds 68,700 DKK in a year, it can also result in a 15% tax penalty for your child on that amount.

Is it necessary to create a lease agreement?

No, a written lease agreement is not actually required, but it is still a very good idea to take the time to create one. There are three main reasons for this:

1. With a lease agreement, your child can apply for housing benefits
2. You can provide proof of the agreement made if the tax authorities require further information about your rental business
3. Both parties get a clear agreement that you can always refer to if necessary.

That is why we recommend creating a lease agreement. For example, you can create a lease agreement with Legal Desk.

Which expenses can you deduct?

One of the things that can be difficult to figure out when reviewing the rules for parent purchases is which expenses you can deduct for tax purposes. You are entitled to deductions for expenses that enable you to operate your "business" and maintain the property.

The Danish Tax Agency distinguishes between maintenance and improvements. Maintenance includes, for example, painting. Improvements, such as a new kitchen or bathroom, increase the value of the property, but these are not tax-deductible.

Here is a list of some of the deductions you may be eligible for. Our tool helps you access all available deductions:

1. Deductions for interest and fees
2. Maintenance – including painting, repairs due to wear and tear, and general items that maintain the property's value
3. Electricity, water, and heating
4. Common expenses – this can include costs for insurance, drainage fees, etc.

This is not an exhaustive list. As mentioned, our tool helps you claim all the deductions you are entitled to, and you can try it for free.

What can you not claim deductions for?

1. Major appliances
2. Loan repayments
3. Improvements to the rental property, such as a new kitchen, bathroom, or flooring

If you need help getting a handle on all the deductions related to your parent-purchase, you can use our tool to calculate them. In addition, you will receive an overview that tells you which figures and boxes to fill in on your tax return to ultimately claim the deductions. Claim all the deductions you are entitled to with Reportability.

What rules apply when selling a parent-purchase property?

If you eventually decide to part with your parent-purchase property and want to sell it, it is also important to be aware that special rules apply here.

If you sell the property to someone who is not a close relative, you must pay tax on any profit. This additional taxation occurs because you have not lived in the property yourself.

On the other hand, you could also consider selling the property to your child. In this context, it is possible, for example, to sell the property at the most recent official property valuation minus 15%.

Do you need help getting a handle on taxes and rules for your parent-purchase?

It can be overwhelming to learn the rules, deductions, and tax requirements for parent-purchases. At Reportability, we have helped many parents who have purchased property for their children with their tax reporting and answering questions.

Shall we help you too?