Rental Accounting of Property | Parent Purchases

When are rental income basically taxable?

If you rent out your entire property, if you only have room rental or if your apartment is owned by your parents and you pay rent, your rental income is basically taxable. You must remember to calculate your taxable income from the rental and report it to the Tax Authorities, even if you have a foreign property that is rented out.

It is important that you know the tax rules for leasing real estate. If you do not have the funds or the desire to familiarize yourself with the rules, we recommend that you seek professional advice.

For tax purposes, these are two distinct concepts of rental. The taxation depends first and foremost on whether it is part rental or commercial rental:

Commercial rental:

If you rent out your entire home for a period of more than 12 months and at the same time do not live in it, this is a commercial rental. This means that income is taxed as personal income.

Partial rental:

If you rent out your own home for a period of less than 12 months or have a room rental, this is a partial rental. This means that income is taxed as capital income.

Partial Rent

For partial rental, you can choose between a bottom deduction method or the accounting method.

Bottom Deduction Method

As of 2018, you can choose from the following two methods:

1) The Bottom deduction method is the simplest method, giving a bottom deduction of 1.33% of the property value, but always the least. You have to pay tax only on the part of the rental income that exceeds the basic deduction.

2) Since 2018, another option for bottom deduction has been introduced. The new rules provide for a fixed base deduction of DKK 28,600 in 2019. You must pay tax of 60% of the part of the rental income that exceeds the base deduction. You have the choice to choose which of the two methods you want to use. The size of the property valuation and rental income will be decisive for determining the best solution for you.

Accounting Method

When choosing the accounting method, you must pay tax on the rental income after deducting the actual expenses. A statement of rental income and expenses must be prepared. Please note that if you choose to use the accounting method, you will not be able to switch to the method with a basic deduction later.

Commercial Rental

Commercial rental is considered to be self-employed income from your rental property, as you operate the rental property at your own expense and risk and for the purpose of making financial profits. With parental purchases and simultaneous rental for your child, at present you will subject to the rules of commercial rental.

In this way, the National Tax Board gives the opportunity to choose between three taxation methods:

PSL - Individual Tax Law

VSO - The Business Scheme

KAO - Return on Investment scheme

Whichever method you end up choosing, prepare a rental account that shows the result of the profits, as well as an inventory of assets and liabilities.

Our Advice

As a starting point, we recommend that you choose taxation according to VSO, especially if you are in the highest tax bracket. However, first and foremost you should not mix the rental with your own private finances. The rental business must be run in a separate bank account where the rental income is accrued, and the operating costs deducted. As a starting point, you should seek professional advice when using VSO or KAO, as these models are highly complex.

It should be noted that the above tax schemes / rules are not adequate. All aspects of this complex issue have not been covered. If you have further questions, we recommend seeking personalized advice.

Over the years we have built up a wealth of professional knowledge and expertise with rental properties. Our expertise lies in two business areas: taxation and consulting with property purchase and sale.

Feel free to contact us and get a free and no obligation quote. We would like to talk about how we can help you and what solutions you need.

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