ᐅ Buying a House – A Complicated Situation

Hello,

I am currently in a somewhat complicated situation and am seeking advice here.
The situation is as follows:

My wife and I are currently renting, but we want to move back to our hometown sometime this year or next.
There, as in many other parts of Germany, the real estate market is very tight. In other words, extremely high purchase and rental prices for properties that aren’t really worth that much.

Since we have been looking for a suitable property to buy for quite some time without finding anything appropriate or only finding grossly overpriced options, we have considered moving into the original family home where my father currently lives alone.

In order for us to move in there, it would be necessary for my father to find a 1-2 bedroom (or 1-2 room) apartment for himself. Our idea was that we would act as buyers for that apartment and then rent it to my father.
At the same time, we would move into the family home as tenants and pay rent to my father.

My father would grant us the first option to buy the house, and we could later decide whether to take over the house or not.
Of course, he could also sell the house to us directly at a reasonable price now, but the problem here is:
1. There are still outstanding debts on the house.
2. I have two brothers who also need to be considered. In other words, a gift in this sense is currently difficult without anyone feeling overlooked.

Therefore, the rental model has the advantage that over the next few years, during which our income situation is uncertain (family planning/moving/job changes), we would not face such a high financial burden. Buying an apartment for around 200,000-300,000 euros (approximately 220,000-330,000 USD) is much more manageable for us than purchasing a house for 500,000-700,000 euros (approximately 550,000-770,000 USD).
Additionally, if I understand correctly, when renting to a family member, it is possible to save on taxes (reduce deductible expenses?), although it must be noted that at least 50% of the local market rent must be charged.

Does this make sense?
Have I overlooked something significant?
Or is there perhaps a better solution we haven’t thought of yet?

Thank you very much for your help.

Patblue schrieb:

You’re talking about extremely high purchase and rental prices for real estate that aren’t really worth that much.

That’s just subjective ;-)

Patblue schrieb:

He could, of course, also sell us the house now directly at a low price,

And why not at the "right" price? Too expensive?

Patblue schrieb:

In order for us to move in there, the prerequisite would be that my father finds a 1-2 room apartment for himself. We had the idea that we act as buyers for the apartment and then rent it to my father. At the same time, we move into the parental home as tenants and pay rent to my father.

That’s possible. You would declare the rental income, and your father would too. You’d need to calculate if it’s worth it.

Patblue schrieb:

where it must be considered that at least 50% of the local standard rent is charged.

With discounted rent, it must also be noted that a so-called consideration limit is adhered to if the full deduction of expenses for income-related costs is to be maintained: This limit is (as before) 66% of the local standard rent (§ 21 section 2 sentence 2 Income Tax Act). Even when agreeing on rent of 50% or more, but less than 66%, a full recognition of income-related expenses is possible from 01.01.2021 onwards if there is a (positive) total surplus forecast. So you also have to calculate whether 50% works.

Patblue schrieb:

Did I overlook something major?

Yes, you need to invest equity for purchasing the apartment, which you might later need for buying a property. And if you can afford the rent for the house (or even just live there at a reduced rent – what do the siblings say about that?), then you can also afford to buy it at the regular price.

Hello

You can do it like that, or he might sell it to you for a lower price.

nordanney schrieb:

And why not at the "right" price? Too expensive?

Yes, that’s exactly the issue.
The “right” house price is around 550,000 to 600,000 euros (about 590,000 to 640,000 USD) plus renovation costs of another 50,000 to 100,000 euros (about 55,000 to 110,000 USD), which is currently barely feasible for us, if at all, and only at the very limit.
Since our income is uncertain in the coming months and years (possibly a new job – salary? Parental leave? etc.), we are looking for an alternative option.

nordanney schrieb:

That’s possible. You have to pay taxes on rental income, but so does your father. You need to calculate whether it’s worthwhile.

My idea is to lower my taxable income by generating losses from rental income. In other words, I would charge only 50 to 66% of the local market rent, then deduct bank interest, repairs, etc., resulting in a loss that would give me a tax advantage.
Is this correct or nonsense?

My father is already retired, so it’s not such a big issue that he has to pay tax on the rental income (I think?).

nordanney schrieb:

Yes, you will have to use your own equity to buy the flat, which you might later need for purchasing a property. And if you can afford the rent for the house (or live there at a reduced rate – what do the siblings say about that?), then you can also buy it at the regular price.

In that case, the father could buy the flat from us, and in return we would take over the house. That still leaves several years, which we can use to build additional equity.

As mentioned before, we currently can’t afford to buy the house at the regular price.

As siblings, I would feel quite taken for a fool.

Patblue schrieb:

Is this correct or nonsense?

Correct. But it only works if a) you have enough deductible expenses (interest, depreciation, and non-allocable operating costs – you have to calculate this) and a high marginal tax rate. And if you want to produce a loss every year, you will probably have to apply the 2/3 rent rule in order not to be rejected by the tax authorities.

Patblue schrieb:

My father is already retired, so it’s not so bad that he has to pay tax on rental income (?).

At least he has to file a tax return every year and declare the income. Whether he then has to pay taxes depends on his other income. It could go well or could become expensive. Without more information we can’t tell.

Patblue schrieb:

In that case, the father could buy the apartment from us and we take over the house in return. Until then, there are still a few years we can use to build additional equity.

Well, not sure if everything will go smoothly with the valuations and the siblings...

Patblue schrieb:

That we currently can’t afford to buy the house at the regular price – see above.

Then you also can’t rent it if the rents are that high. Unless the rent is set too low, which would make both the tax authorities and the siblings feel cheated.
If the net rent (excluding utilities) is around €1,500 (+X?), which fits well for a house price like that in a suitable location, you could also take out a loan of almost half a million because the repayment rate would be the same.