Curious financing idea

I wouldn’t write off the plan just yet, only plan everything without involving the parents. They have no place in the financial part given this starting point. As for the future with children, parental leave, etc., we lack information such as the salary distribution and so on... To ask differently: What is the current basic rent and how high is the monthly savings rate?

I understand it like this: you tell the bank you need 100k for renovations but in reality you only take 50k for renovations and with the other 50k you pay your father-in-law back his money

If that is your plan it makes no sense and will not work. The bank will not give you the money just like that. The bank wants proof of what was done with the money

My wife and I temporarily lived in an apartment for about a year. We did not pay any rent. What exactly would my mother and her boyfriend have had to declare as taxable income? I don’t quite understand.

Can you somehow back up your statement with sources? The only rule I know is that if relatives live for less than 60% of the comparative rent, the depreciation options as an investment property no longer apply. So 2% of the building value per year as well as administrative, maintenance, and renovation costs are no longer deductible.

I can look that up sometime. I have plenty of correspondence with the tax office about it. The conclusion is that rent-free living for relatives is not allowed (in the tax sense) and rent is assumed by the tax office as fictitious rent. This then forms the basis for the profit and loss calculation.
You can perhaps compare it somewhat to a non-cash benefit. You also have to consider the self-generated electricity from the photovoltaic system and pay the state for it.

And where does it start and where does it end?

One's own children or parents?
Siblings?
Letting a friend live with me for 3 months?

Well, that's really the first time I've heard that...

And where does it start and where does it end?

Your own children or parents?
Siblings?
Letting a friend live with me for 3 months?

The result will be told to you by your tax office when you fill out the Anlage V+V (or the tax advisor) and reach the section "preferential renting to relatives".

I assume that letting someone live for free is not a problem for the tax office as long as you do not want to deduct the costs (interest, repairs) for the property on your taxes. And, as long as no money is actually received for the living.

But if the parents lend 50,000 euros and instead of receiving 300 euros repayment every month, they live in the second apartment, then these 300 euros are basically a fictitious rental income.