Rental investment in Luxembourg: how to achieve sustained returns

The real estate market is tight, but despite this rental yields are under pressure. It is worth considering the advantageous tax implications of deducting interest charges and accelerated depreciation options.

The state of the Luxembourg property market invites much comment, with most attention focused on rising prices. Investors consider bricks and mortar to be a particularly attractive investment. "We see two approaches to property investment. There is a purely speculative approach, buying in the hope of realising a capital gain when you sell in a few years," said Marie Melikov, Senior Estate Planner at Degroof Petercam Luxembourg. 

Those who invested in real estate a few years ago have done well. The market suffers from a structural lack of supply, and prices have grown strongly year-on-year. "Others take a more long-term approach, attracted by property as a way of invest, with rental income helping to finance the purchase over time," she added.

Take advantage of the tax system

Whichever of these complementary approaches is taken, a number of variables need to be considered. This is particularly the case for rental investments which feature ways to optimise returns. “The Luxembourg property market remains tight, with rental yields tending to be squeezed," explained Ms Melikov. “Before acquiring a property, it is important to consider every option in the light of the objectives being pursued.”

Investment in rental property is still very attractive in Luxembourg, largely due to the available tax advantages. "Investing in rental property enables private investors to reduce their tax base by generating losses," noted Ms Melikov. She added that this is one of the few ways in which a person who is fully taxable in Luxembourg can reduce their tax burden.

Deducting interest charges and depreciation

“Every year, every person liable for tax in Luxembourg is required to declare their income, including that from the rental of a property located in the country," she said. “The taxpayer can deduct certain expenses via their tax return, including loan interest, which, in the case of a rental investment, has no ceiling nor management fees associated with a property. The tax base can be further reduced by deducting depreciation related to the acquisition of a rental property. This is calculated on the basis of the purchase price, minus the value of the land.”

Age of the building affects depreciation options.

In an effort to curb speculation in the rental property market tax depreciation rates applied to rental income have been reduced. As of 1 January 2021, for buildings used for rental housing that were completed less than 5 years ago (and no longer than 6 years ago), the rate is reduced from 6% to 4%. “This depreciation rate remains significant and mainly supports rental investment in new properties," said Ms Melikov. “In the first few years after construction, this annual rate is only 2%, but returns to 3% for buildings over 60 years old.”

These rules also apply to investment expenditure incurred during the renovation of an old dwelling, provided that it exceeds 20% of the acquisition or cost price of the building (excluding the value of the land).

It should also be noted that the accelerated depreciation rate of 6% has been maintained for sustainable energy renovations that are less than 9 years old on 1 January of the tax year. 

BE WELL SUPPORTED

“By taking into account the value of depreciation, combined with interest charges, it is possible to create a property deficit that can be deducted from taxable income and therefore reduce the tax base," explained Ms Melikov. “This is how investors can boost the profitability of rental investment.”

Experts at Banque Degroof Petercam support their clients as they consider these moves, helping them to develop a strategy around the opportunities linked to a rental investment. They take into account questions concerning structuring, planning and financing.

Questions about a rental investment in Luxembourg? Contact Marie Melikov, Senior Estate Planner: m.melikov@degroofpetercam.lu