Can I rent to relatives at a lower price?

The tax trap: Imputed rental value as a lower limit

The key concept you need to understand when renting to relatives is the imputed rental value. It's a notional income that every homeowner must declare for tax purposes if they live in their own property. It usually corresponds to about 60 to 70 percent of the market rent.

If you decide to rent to relatives , the tax office will take a close look:

• Rent above imputed rental value: If you charge your nephew rent that is higher than the imputed rental value, everything is fine. You pay taxes on the actual income.
• Rent below the imputed rental value: This is where it gets tricky. When renting to relatives at a price below the official imputed rental value, the tax office often does not accept the rental income as a basis for assessment.
• The consequence: The tax office will count the higher imputed rental value as income instead of the rent you received.
• The result: You are subsidizing your relative twice – once through the cheap rent and once by paying the taxes on the difference out of your own pocket.

A rental to relatives that is to be tax-neutral must therefore at least cover the imputed rental value. Anything below that is considered a gift, which is ignored (adjusted) for tax purposes when calculating income.

The "third-party comparison": What is standard market practice?

In addition to the imputed rental value, tax authorities often use the so-called "third-party comparison" when renting to relatives . They ask: Would you rent the apartment to a stranger for the same price?

If the answer is "no", then a preferential rent applies.

When renting to relatives, a reduction compared to the market rent is permitted, but it has limits.

• Many cantons tolerate a discount of approximately 10 to 20 percent compared to the market rent when renting to relatives , without immediately using the imputed rental value as a lower limit – as long as the rental income does not fall below the imputed rental value.
• If the rent is extremely low when renting to relatives (e.g., only covering utilities), the tax office may classify this as "rent-free accommodation." In that case, you would have to pay full tax on the imputed rental value.

A calculation example for renting to relatives

Imagine you own an apartment.

• Market rent: 2,000 CHF/month.
• Imputed rental value (for tax purposes): CHF 1,400/month.

Scenario A: You arrange a rental to relatives for 1,500 CHF.

Since 1,500 CHF is higher than the imputed rental value (1,400 CHF), you pay tax on the actual 1,500 CHF. Everything is correct.

Scenario B: You are planning to rent to relatives for 1,000 CHF (friendship price).

The CHF 1,000 is below the imputed rental value of CHF 1,400. The tax office will adjust your income in your tax return. You will have to pay tax on CHF 1,400, even though you only receive CHF 1,000. Renting to relatives will therefore result in a tax loss for you.

Caution regarding supplementary benefits (EL)

An often overlooked aspect of renting to relatives concerns the older generation. If you rent your parents an apartment at a very low rate and they receive or intend to apply for supplementary benefits (EL), there is a risk.

• Waiver of income: If your parents give away assets or waive claims when renting to relatives (in this case to you as a child, or vice versa), this will be counted as "fictitious assets/income" to them.
• If you, as a child, rent an apartment to your parents well below market price, this usually has no effect on their supplementary benefits. However, if your parents rent you an apartment too cheaply as part of a sublet agreement with relatives , they will be deemed to be "foregoing income" when calculating your supplementary benefits. This can result in a reduction of your benefits.

It is essential to seek professional advice when renting to relatives in the context of social benefits.

Contractual agreements are mandatory.

Even if you love and trust each other: A rental agreement with relatives should never be sealed with a handshake.

• A written rental agreement is required: It serves as evidence for the tax office. Without a contract, the tax office could claim that, in the case of rentals to relatives , it is not a rental agreement but merely a loan for use, which could jeopardize the deductibility of maintenance costs.
• Additional costs: When renting to relatives, clarify exactly who pays for what. Flat rates are often simpler than detailed billing, which can lead to petty arguments within the family.

Deductions are possible when renting to relatives

One advantage remains: Even when renting to relatives, you can claim mortgage interest and maintenance costs (value preservation) as tax deductions.

• As long as you pay tax on the imputed rental value (even if the actual rent is lower), the property is considered a source of income. This means you retain the tax deductions when renting to relatives .
• Caution is only advised if the rent is so extremely low (symbolically 1 franc) that the tax office considers it a "hobby." In practice, this is rare in real estate taxation, but when renting to relatives, the standard principle is "deduct maintenance costs, tax the imputed rental value."

Conclusion

The question "Can I rent to relatives at a lower rate?" can be answered with "Yes, but not without limits." Renting to relatives is a wonderful way to support family. However, it's not a legal vacuum. In almost all cantons, the imputed rental value forms the lower tax limit.

Renting to relatives below this value will result in financial loss. The smartest strategy is to choose a rent that is exactly at or slightly above the imputed rental value. This way, the relative benefits from a rent that is still 30 to 40 percent below market value, while you, as the owner, avoid paying unnecessary taxes on imputed income.

If you are unsure about the current assessed imputed rental value of your property or how to legally structure a rental agreement for renting to relatives , Loft offers neutral data and analyses to protect your family assistance from unpleasant surprises.

Glossary

• Imputed rental value: A notional income for tax purposes for owner-occupied properties or properties rented below market value . It forms the lower tax limit when renting to relatives .
• Third-party comparison: A review procedure by the tax authorities. They examine whether the terms of renting to relatives correspond to those that would be offered to a stranger.
• Preferential rent: A rent that is significantly below the market rent. This is permissible when renting to relatives , but triggers tax adjustments above a certain threshold.
• Tax evasion: The attempt to save taxes through unusual legal arrangements (e.g., extremely low rent when renting to relatives ), which is not accepted by the tax authorities.
• Supplementary benefits (EL): State support payments in addition to old-age and survivors' insurance (AHV/IV). When renting to relatives, an excessively low rent can be considered a loss of income and thus reduce the EL.