You want to invest in a property in the Grand Duchy and then make a rental? At first sight, it seems an excellent decision! Investing in a rental property remains attractive, especially in a country where the market for rented residential real estate continues to display a high potential. In addition, there are no restrictions on foreigners buying real estate in Luxembourg and the home-buying system is generally similar to many other EU countries. But to ensure that your investment is really profitable, you should pay careful attention to the property’s location and be aware of the applicable rental property taxation.
Even if the rental prices have almost doubled over the past ten years in Luxembourg, you should not buy your property anywhere! Significant disparities continue to exist between regions and municipalities, depending on their geographical location and accessibility. Rental prices are higher in the Centre and the South than in the North where, apart from areas near the Northern Highway, direct connections to the capital are relatively rare.
The type of property in which you want to invest may also have an impact. Apartments of approximately 70 to 90 square metres with 1 or 2 bedroom(s) are in greater demand for rental purposes as these are perfect for single-person households or couples with a child. New properties help you avoid renovation costs and are more likely to meet the applicable energy requirements, which is often considered an essential criterion by many candidate tenants.
Whoever you are – a Luxembourg resident or a non-resident -, you have to report the rental income to the Luxembourg tax authorities if the rental income exceeds EUR 600 per year. If you are a Luxembourg resident taxpayer or treated as such, you must declare the income received by renting your real estate in the same way as your salary and any other investment incomes received. If you are a non-resident, you must declare the (non-exempt) rental income on the income tax return form (Form 100). Be careful! If you opt to be treated as a resident taxpayer when filling in your income tax return (according to article 157ter), you must also report the rental income from your properties owned abroad!
To reduce your taxable profit, you can deduct from the gross rental income (determined by aggregating any payment made by your tenant) acquisition expenses. They include bank interests and charges linked to the property financing, insurance premiums (fire, civil liability, etc.), property tax, repair and maintenance costs (repainting, roof and heating repairs, plumbing repairs, etc.) and other deductible expenses paid by the owner and not reimbursed by the tenant such as management fees, water fees and rubbish-collection fees.
The deductible expenses also include the fiscal depreciation of the construction. The amortization rate applied to the purchase price (excluding land), plus the notarial deed fees and investment related expenses, varies depending on the building's year of construction: 6% for buildings less than 6 years ago, 2% for buildings between 6 and 60 years ago, 3% for buildings more than 60 years ago.
As you can see, deductible expenses can make your taxable rental income very low or even negative, especially if you buy a new property and get a loan.
If you are a Luxembourg resident and sell your principal residence, capital gains on the sale are tax-exempt. If not, there are several types of tax treatment. If you sell your real estate less 2 years after its acquisition, the income earned is called speculation profit and will be taxed at ordinary progressive rates. Depending on the level of your annual taxable income and the situation of your family, the marginal tax rate is set at a maximum of 42%. If you sell your real estate more than 2 years after its acquisition, the income earned is called capital gain on the sale and will be taxed at a maximum rate of 21% (half of the global rate). The capital gain on the sale also benefits from a ten-year deduction of EUR 50,000 (EUR 100,000 if your couple is taxed collectively).
 Provided that you meet the following conditions: at least 90% of your income must be taxable in Luxembourg or your net cumulated income no subject to Luxembourg taxation is below EUR 13,000.
 Your residence is considered principal provided that you occupied it at the year of the sale and for at least 5 years preceding the sale or following its acquisition or completion.
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