Renting below market to relatives: Germany's 66 % rule

Last updated: 25 August 2026 · Reading time approx. 8 minutes

Your daughter moves into the flat, your father into the top floor, a long-standing tenant has not seen an increase in years: in all of these cases the agreed rent sits below what the market would pay. For German tax purposes that is not a side issue. § 21 (2) EStG contains two percentage thresholds, and between them it is decided whether depreciation, loan interest and running costs stay fully deductible or only count for a fraction. This article shows what the wording of the statute actually says, works the effect through on an example – and states plainly what the provision does not regulate.

This article deals exclusively with the law in Germany. Austria and Switzerland treat below-market lettings of residential space under their own, different rules, which are not covered here.

What § 21 (2) EStG says word for word

The provision consists of exactly two sentences. Sentence 1 reads: “Where the consideration for letting a dwelling for residential purposes amounts to less than 50 percent of the local market rent, the grant of use is to be split into a paid and an unpaid part.” Sentence 2 reads: “Where, in the case of a letting of residential property intended to be permanent, the consideration amounts to at least 66 percent of the local rent, the letting is deemed to be for consideration.” (Translations of the German original; the binding text is the German wording linked under Sources.)

That is all there is. Two thresholds, two legal consequences – and between them a range the statute deliberately does not attach an order to. Exactly that structure gets flattened by the usual shorthand “66 percent, otherwise it gets cut”.

Three zones, two thresholds

Agreed rent	What the statute orders	Reference
at least 66% of the local rent	The letting is deemed to be for consideration – a statutory fiction. Condition: the residential letting must be intended to be permanent.	§ 21 (2) sentence 2 EStG
50 to under 66%	Neither consequence applies directly: the split only starts below 50%, the full-consideration fiction only from 66% upwards.	Inference from both sentences
less than 50% of the local market rent	The grant of use must be split into a paid and an unpaid part. No discretion, no election.	§ 21 (2) sentence 1 EStG

The split itself is ordered by the statute; the consequence for the deduction follows from the general definition of income-related expenses. Under § 9 (1) sentence 1 EStG, Werbungskosten are “expenses incurred to acquire, secure and maintain income”. No income is attributable to the unpaid part – and therefore nothing that the proportionate expenses could attach to.

The worked example

A 75-square-metre flat held in the portfolio. The local rent is €1,000 a month, so €12,000 a year. The owner's annual costs – depreciation, loan interest and non-recoverable running costs – add up to €9,600. Three variants:

Variant	A: €700	B: €640	C: €450
Share of the local rent	70%	64%	45%
Zone	66% and above	middle range	below 50%
Rental income per year	€8,400	€7,680	€5,400
Share of costs that can be taken into account	full	–	45%
Deductible costs	€9,600	–	€4,320
Result from letting	−€1,200	–	+€1,080

Comparing A and C is the real point. In variant C, €3,000 less rent comes in – and yet the result is a taxable surplus of €1,080 instead of a loss of €1,200. The tax result swings by €2,280 in the wrong direction, because the costs are cut along with the rent that was already low. The discount costs twice: once at the bank, once at the tax office.

Why €20 a month can decide the outcome

Variant B sits at €640, that is 64%. It is €20 a month short of the fiction in sentence 2: at €660 exactly 66% is reached, and the wording says “at least 66 percent” – so the threshold itself counts. €240 more annual rent decides the legal consequence here. Raising the rent, however, is a matter of tenancy law rather than tax law: the consent procedure, the notice periods and the capping limit apply unchanged, including towards your own family. How that works in practice is set out in calculating a rent increase: capping limit and deadlines.

Four details in the wording that are routinely missed

It is not only about relatives. The wording speaks of “letting a dwelling for residential purposes” and names no family relationship. A rent kept low out of goodwill for a long-standing tenant falls under it just as much as the flat for your own child.
Residential purposes only. Both sentences are written for residential space. The provision does not apply to a commercial unit let below market.
Sentence 2 requires permanence. The fiction only applies to a letting “intended to be permanent”. A grant of use that is short-term from the outset does not automatically meet that requirement.
Two different terms. Sentence 1 measures against the “local market rent”, sentence 2 against the “local rent”. The legislator does not use one single term throughout – one more reason to establish the comparison benchmark carefully in each case.

What the statute leaves open

There are two points where asserting a hard figure here would be dishonest:

First, the range between 50 and 66%. All that follows from the wording is what the table above says: the split ordered by sentence 1 does not apply because it requires consideration below 50%, and the full-consideration fiction of sentence 2 does not apply because it requires at least 66%. What is actually examined inside that corridor is not something § 21 (2) EStG itself regulates. Anyone who lands there has left the area the statute decides expressly, and should have the case looked at professionally before filing – or set the rent so that the question never arises.

Second, the comparison rent itself. Whether the benchmark comprises the base rent alone or also the recoverable service charges does not follow from the wording of the provision. The question is not academic: it shifts the denominator of the fraction and with it the percentage on which everything depends. If you are close to either threshold, have the benchmark clarified for your case rather than relying on a rule of thumb found online.

What follows in practice: keep your distance from the threshold. Budgeting at exactly 66.0% means losing the fiction as soon as comparable rents next door go up. A buffer of a few percentage points costs little rent and saves the entire discussion.

What you should document

At its core the test is a fraction of two figures – and the owner has to be able to evidence both, often years later:

The agreed rent and its components: the written tenancy agreement including every variation.
The comparison benchmark at the relevant point in time: extracts from the local rent index (Mietspiegel), comparable listings or a valuation – dated and kept, not reconstructed after the fact.
The flow of money. A tenancy that exists only on paper does not help. Standing orders and bank statements are the simplest evidence.
The annual re-check. The percentage is not a one-off figure: it falls quietly when comparable rents rise and yours stands still. A property that was at 72% when the tenant moved in may have slipped below 66% a few years later without anyone doing anything.

How the figures then travel into the tax return is shown in filling in Anlage V: the guide for landlords; what the discount does to the running numbers is worked through in calculating the cash flow of a rental property.

What the courts have decided

Two questions the wording of the statute leaves open have been settled for practice by the Federal Fiscal Court (Bundesfinanzhof, BFH): what the local market rent is actually measured against – and whether reaching the 66% threshold really ends every further check.

BFH, judgment of 22 February 2021 – IX R 7/20

The local market rent must generally be determined from the local rent index (Mietspiegel); every value within its published range counts as local-market, not only the mid-point. Where no rent index exists or none can be applied, the market rent may instead be established, on an equal footing, from an expert valuation, a rent database, or the rents charged for at least three comparable flats. For the 66% test that means: if a rent index covers your location, use it first rather than reaching for a more elaborate method.

BFH, judgment of 20 June 2023 – IX R 17/21

For flats with more than 250 square metres of floor space, the typifying presumption of an intent to generate income does not apply automatically – even where the rent meets or exceeds the 66% threshold, the tax office may still demand a separate long-term profit forecast (Totalüberschussprognose). The Senate expressly upheld this exception even after the full-consideration fiction was inserted as § 21 (2) sentence 2 EStG. Anyone letting a generously sized flat to relatives is therefore not automatically in the clear on the 66% mark alone.

Frequently asked questions

Does the 66% mark apply per flat or per building?

§ 21 (2) EStG refers to “letting a dwelling”. What matters is therefore the individual tenancy over the individual flat, not the average across an apartment building. A unit let cheaply does not become unproblematic because the others are let at market rates.

What applies if I charge no rent at all?

Then § 21 (2) EStG does not apply in the first place: the provision presupposes “consideration” and merely grades its level. Without consideration there is no income – and therefore no reference point of the kind § 9 (1) sentence 1 EStG requires for deducting expenses.

What happens if I slip below the threshold in a single year?

The test is made for the relevant assessment period. A year below the mark therefore takes effect in that year – and a subsequent increase takes effect from the year in which the higher rent is actually paid. That is precisely why the check belongs in an annual rhythm and not in a tenancy agreement signed long ago.

Can I simply raise the rent retroactively?

No. For tax purposes what counts is what was actually agreed and paid in the year in question. An agreement drawn up after the event does not repair a closed year – it tends to raise further questions instead.

Don't lose sight of the percentage

RenoDiary keeps base rent, comparison rent and floor area per unit – and prepares the income-related expenses year by year for Anlage V. So you can see when a flat is heading towards a threshold.

Start for free

Sources

§ 21 EStG (income from letting and leasing, subsection 2) — Gesetze im Internet (retrieved on 12 August 2026)
§ 9 EStG (income-related expenses, subsection 1 sentence 1) — Gesetze im Internet (retrieved on 12 August 2026)
BFH, judgment of 22 February 2021 – IX R 7/20 (determining the local market rent, priority of the rent index) — Federal Fiscal Court (retrieved on 25 August 2026)
BFH, judgment of 20 June 2023 – IX R 17/21 (long-term profit forecast for floor space over 250 sqm) — Federal Fiscal Court (retrieved on 25 August 2026)

This article offers general orientation and does not replace individual tax or legal advice within the meaning of § 3 StBerG. What governs is the wording of the law as applicable at the time, the circumstances of the individual case, and advice from a person authorised to give it.