Personal loans are loans between several, usually two, private individuals. For example, parents grant a personal loan to their children, who use this money to purchase a property belonging to the father. These and other designs result in considerable design potential, which – for example – were lost in a donation. We provide an overview of the tax treatment of personal loans.

1. What is behind the personal loan?

Loans are one of the classic forms of fundraising in everyday business and private life. Entrepreneurs finance investments with loans, private individuals use loans for the purchase of detached houses, apartments and rental properties. As a rule, loans are issued by credit institutions, i.e. the house or investment bank.

If private individuals borrow money, on the other hand, there is talk of a personal loan. Its structure and contract design correspond essentially to those of a bank loan, but no credit institutions or other third parties are involved in the contractual relationship.

The contracting parties also conclude a loan agreement with the private loan. It is important that this – decisive for tax recognition – withstands the so-called “external comparison” (BFH of 13.07.1999, VIII R 27/97). If there are no external conditions, the tax office can, for example, completely or partially exclude the deduction of interest as advertising costs. The same applies to the tax treatment of the corresponding capital gains.

Private loans: tax design with real estate

Especially in the transfer of real estate in the family group, private loans have significant advantages. These consist primarily in the fact that the interest paid is not available to the bank, but directly to the parents or children. They also remain within the family and can be used here, for example, for investments or donations to an existing family foundation.

The transfer of real estate in the family group with the simultaneous granting of a personal loan takes place in practice in three steps:

2.1. Step 1: Transfer of property

The parents own a property and want to transfer it to the children. In principle, a donation is planned, but this would lead to the children being able to claim no or too little depreciation (AfA) due to lack of their own acquisition costs. Therefore, the children should bear their own expenses, which subsequently reduce the income from renting and leasing.

Parents therefore sell the property to their children at the current market value. At the same time, they grant a personal loan over the purchase price, taking into account the principle of external custom. The children finance the property purchase price with the loan and pay, optionally with or without repayment, interest payments to the parents. If no repayment is agreed, it is a final loan.

2.2. Step 2: Depreciation of the property

The children are now owners of the property, rent it to other persons and receive corresponding rental income. From these, they deduct the interest paid to the parents as advertising costs (§ 9 (1) sentence 3, number 1 EStG), so that the rental income decreases overall.

They also created new AfA volume. For example, if the property was sold to the children for EUR 1,000,000, the annual depreciation amounts to EUR 20,000 (§ 7 (4) EStG). If rental income of EUR 60,000 is now added, only EUR 30,000 (for assumed interest of EUR 10,000) is taxable.

Interest from a personal loan is subject to taxation with a maximum of 25% at the parents (§ 32d paragraph 1 EStG). At the same time, they are deductible in full for the children, so they save around 50% of the tax at the top tax rate. If the purchase price, loan amount and interest rate are structured accordingly well, the income of the children from renting and leasing can also be reduced to EUR 0.00.

2.3 Step 3: Tax-free disposal after 10 years or later

As new property owners, 10 years after purchase, the children have the opportunity to sell the property tax-free, just like the parents. They can also agree on a market-standard purchase price and thus create new AfA volume for the buyer. In addition, a transfer to the grandchildren is possible, whereby the named design model is simply used again.

Always prefer selling with personal loans to donation!

If parents simply give their property to the children, there are several disadvantages for tax purposes. On the one hand, gift tax of up to 30% is due, on the other hand, the children may no longer have their own AfA volume. Thus, the taxable rental income is correspondingly higher, which leads to a considerable – and at the same time avoidable – tax burden!