Buy-to-let investment in Luxembourg: what's the tax position for rental income?

Investing in property to rent raises a number of tax issues, especially filing a tax return. Anne-Lise Grandjean, Tax Adviser at Banque de Luxembourg, discusses aspects of tax on rental income.

Overview of tax on rental income 

When you rent out a property in Luxembourg, you must declare the income in a Luxembourg tax return. The income will be taxed at your overall tax rate. Here is an overview of the tax position on rental income from property owned by individuals as part of their personal assets.

The taxable base is composed of rent received minus certain rental expenses. The main rental expenses are mortgage interest and depreciation. Mortgage interest is fully deductible.

Depreciation is calculated on the basis of the purchase price or construction cost of the property excluding the land value plus registration fees and VAT. The land value cannot be depreciated. If the land value is not known, the tax authorities will consider it to be 20% of the acquisition price. Depreciation is determined by the age of the building so it is important to know when the property was constructed. The depreciation rate is 6% in the year of construction and the following 6 years, 2% until the property is 60 years old, and 3% thereafter The depreciation calculation base is the cost of construction including registration fees and VAT. The land value cannot be depreciated. If the land value is not known, the tax authorities will consider it to be 20% of the acquisition price.

If maintenance and repair works have been carried out on the property to prepare it for rental, these may be deducted in full in the year they are incurred or spread over 2 to 5 years at the request of the tax authorities where sizable expenditure is involved.

Investment expenditure can be amortised. The work is considered as an investment expense (i) if there is a change in the use of the building (e.g. if an apartment used as a dental surgery is converted to a residential unit), (ii) for an apartment with a loft if the loft is converted), or (iii) if there is considerable renovation of the building's condition.

7 points to bear in mind for residential property investment

1. The income on a rental property is taxed at your overall tax rate.
2. Taxable income = Rent – Rental expenses.
3. The main rental expense is mortgage interest.
4. The depreciation rate is:
   - 6% in the year of construction and the following 6 years
   - 2% until the property is 60 years old
   - 3% thereafter.
5. The land value cannot be depreciated.
6. If the land value is not known, the tax authorities will consider it to be 20% of the acquisition price.
7. Investment expenses (e.g. change of use of the building) are amortised.