Renting out your home is a rewarding investment for many, offering a way to earn extra money alongside your regular job. At the same time, it is a significant task to keep track of income and expenses. In this regard, it is essential to know your options for rental deductions, as you may be able to deduct some of your costs.
So, while you generate passive income through your rental, you can also optimize your financial benefits as a landlord.
In this post, you can learn more about your options for tax-optimizing your property rental through tax deductions.
If you need help finding all the rental deductions you are entitled to, you can create an account on Reportability. You can try the tool for free in a trial version, and if it’s right for you, you can purchase access to the full tool, which helps you claim all your deductions, subtract expenses, calculate your tax, and tells you how to report your rental income correctly.
Tax on rental income
When you rent out a property, you must pay tax on the rental income. It is therefore important that you report the income correctly to the tax authorities. Tax rules vary depending on whether the rental is considered private or commercial.
Reportability is a tool suitable for rentals for periods of 12 months or more. This is also known as "commercial rental." We will go into more detail about this shortly.
If you rent out your home occasionally and for less than 12 months a year, you can use a reporting platform and take advantage of the base deduction of up to 33,500 DKK if you rent out for less than 4 months a year.
If you rent out for more than 4 months a year, you can calculate your base deduction using one of the tax authority's methods. Read more about it here.
As mentioned, we help those of you who rent out an apartment or a property that you do not live in yourself, which means 12 months or more. This type of rental is called commercial.
Commercial rental
Commercial rental refers to the long-term rental of a property you do not live in yourself, typically for periods of more than 12 months. With commercial rental, you are considered a small business for tax purposes, and you must complete an extended tax return form with the tax authorities. Here, you must state rental income as well as expenses for maintenance, electricity, water, and heating. You can choose to calculate the tax according to the rules in the Personal Tax Act, the capital return scheme or business tax scheme. Please note that for commercial rentals, where you do not live in the property yourself or have had it available for your own use during part of the year, you are not required to pay property value tax.
It is important to choose the tax scheme that best suits your financial situation and to ensure that rental income and deductions are reported correctly to the Danish Tax Agency (Skattestyrelsen). You can read more about taxes on rentals and the various tax schemes here.
What is a rental deduction?
A deduction is an amount that is exempt from tax. Essentially, you have taxable income from your rental in the form of annual rent, and you can offset any applicable deductions against this, resulting in tax savings.
For example: You have a rental income of 50,000 DKK – this income is taxable by default. Due to wear and tear, you had to paint the property and spent 10,000 DKK on paint – these expenses are tax-deductible. Therefore, they are subtracted from your rental income, making your taxable income 50,000 - 10,000 = 40,000 DKK – you are now taxed on a smaller amount.
Many deductions are calculated automatically because they are reported to the tax authorities by your employer or financial institutions. A common example is your unemployment insurance fund (a-kasse), which automatically reports your contributions so that you receive the tax deduction without any effort.
This is very convenient, of course, but when you rent out a property, financial institutions and other reporting entities do not have the same insight into the specific transactions related to your rental, and they certainly cannot determine whether expenses are tax-deductible or not.
In other words, you must ensure that you report your figures to the tax authorities correctly yourself. To take full advantage of your rental deduction options, it is important that you are familiar with them. It is also essential to keep receipts so that you can prove you have spent money on services and items for which you are claiming a deduction.
What can you claim as a deduction for rentals?
There is a general rule of thumb when it comes to what you can deduct. Legally, your rental activity is considered a business, which makes you a self-employed individual, and that fact allows us to define what you can claim as a deduction.
The general rule is:
"You are entitled to deduct expenses that enable you to operate your business."
- And what does that actually mean? you might be wondering.
In the broadest interpretation of the above, one could argue that you can deduct a great many expenses. For example, your private internet, because you use it to advertise when you have a vacancy. Unfortunately, that is not the case. It is a misconception that you can deduct your private internet subscription, as you most likely do not use it enough for it to be classified as business use.
This general rule has led some people over time to report expenses that do not align with the Danish Tax Agency's own interpretation of the rules for rental deductions. In the worst cases, some have abused this by, for example, buying household appliances, installing them in their private homes, and then claiming them as tax deductions. That did not hold up, and consequently, there is no longer any possibility of claiming deductions for household appliances. But what can you actually deduct?
Examples of rental deductions
For example, you can deduct expenses for property maintenance, property taxes, waste collection fees, and interest on your loans.
Your tax scheme can also affect how much you can deduct. For instance, you receive a higher interest deduction if you use the corporate tax scheme (virksomhedsordningen).
In the real world, there can be many diverse and unforeseen expenses once you start renting out your property. Furthermore, there are some expenses for which you can only claim a deduction when you eventually choose to sell the property. These types of expenses are often referred to as 'improvements' and, as the word suggests, are costs that increase the value of the property.
Unlike the previously mentioned deductions, the tax savings from these are not realized during the year, but only upon the sale of the property. In this case, the expenses are added to the acquisition cost of the property, thereby reducing the capital gain (selling price minus acquisition cost) and providing a tax deduction on any profit from the sale.
Distinguishing whether an expense qualifies for an annual deduction or a deduction upon a future sale can be difficult. This is because many expenses fall into the gray area between the two categories.
This often makes it difficult to keep track of deductions and how they should be reported. Consequently, there are often expenses where individual assessments determine whether a given cost is deductible.
In these cases, it can be a good idea to consult someone with experience and knowledge in the field to optimize your taxes and ensure you remain compliant with the law.
Maintenance versus improvement
In the real world, there can be many diverse and unforeseen expenses once you start renting out your property. There are some expenses for which you can only claim a deduction when you eventually choose to sell the property. These types of expenses are often referred to as 'improvements' and, as the word suggests, are costs that increase the value of the property.
As a landlord, you can only deduct maintenance expenses, not costs incurred for improvements, such as replacing a washing machine, stove, windows, or building a balcony. As a general rule, you cannot deduct expenses that put the property in a better condition than it was in at the start of the rental period.
Unlike the previously mentioned deductions, the tax savings from so-called improvements are not realized during the year, but only upon the sale of the property. In this case, the expenses are added to the acquisition cost of the property, thereby reducing the capital gain (selling price minus acquisition cost) and providing a tax deduction on any profit from the sale.
Distinguishing whether an expense qualifies for an annual deduction or a deduction upon a future sale can be difficult. This is because many expenses fall into the gray area between the two categories. This often makes it difficult to keep track of deductions and how they should be reported. Consequently, there are often expenses where individual assessments determine whether a given cost is deductible. In these cases, it can be a good idea to consult someone with experience and knowledge in the field to optimize your taxes and ensure you remain compliant with the law.
Deductions when selling a property
If you sell a property that you have not lived in yourself, you must pay tax on the profit from the sale. The profit is calculated as the difference between the selling price and the acquisition cost, where the acquisition cost is increased by DKK 10,000 for each year you have owned the property—though not in the year of the sale. Additionally, you can claim a deduction for improvement expenses, which are added to the acquisition cost. This could, for example, be the cost of a new kitchen.
If you sell the property to your child, it can be done at a price within +/- 20% of the latest official property valuation. This can provide tax advantages, as the taxable gain is optimized. If your child subsequently uses the property as their primary residence, your child can sell the property under the parcel house rule. This makes intra-family transfers an attractive option for minimizing the tax burden on property sales.
Reportability finds all the deductions you are entitled to
It can be difficult to keep 100% track of your deductions, but we have made it easy for you at Reportability.
We have gathered all possible deductions in our tool so that you can claim every deduction you are entitled to. Once your expenses have been processed through our tool, you will receive a comprehensive guide that tells you how to report your figures so that everything is handled correctly.
Our auditors have reviewed the legislation so you don't have to spend time on it yourself. If you have any questions about your expenses, you can always ask them in the chat in the bottom right corner.
