Single-family house with undeclared granny flat

Hello dear forum,

We have already read a lot here and were able to acquire some knowledge. Thank you very much for that.
The topic of granny flats is certainly often discussed, but despite searching, we could not find any existing, well-suited threads.

We intend to purchase a single-family house in Baden-Württemberg. It has two full floors and a converted attic. The attic has its own kitchen and bathroom, because the builder originally planned and built it directly as an apartment for his mother. In the building application (from the 1950s), the rooms in the attic are referred to as "Kammer." The attic is accessed through the staircase of the single-family house. It currently has no separate apartment door.

We would now like to convert the attic into a granny flat and would be very grateful for your assessment on the following points:

1) Conversion of the attic into a granny flat:
The development plan allows for single-family houses with one or two residential units. A separate kitchen and bathroom are already present in the attic, only the apartment door is missing.
a) Do we need to apply for a building permit for this?
b) Is it a problem that the rooms are only called 'Kammer' in the building application?

2) Renting out the granny flat and thus tax deductibility of loan interest and incidental purchase costs:
We understand that the tax office recognizes a granny flat if it meets the building regulations. Since the apartment door is missing, this is currently not the case. Let’s assume we manage to realize and have the granny flat recognized.

a) Legally, at the time of purchase the house is a single-family house without a granny flat. How can we maximize the chance of having the attic recognized as a granny flat? Are special formulations in the purchase contract helpful?

b) Does it matter for the deductibility of incidental purchase costs that the granny flat did not yet exist as such at the time of purchase?

c) Allocation of costs: The purchase contract only states a purchase price for the plot including the single-family house. For cost allocation to the granny flat I would therefore use the living area ratio (total: 220 sqm, attic: 23 sqm, plus shared areas (entrance, staircase, laundry room) each at 50% => granny flat: 33 sqm => 15%).

d) We intend to take out two loans for the purchase (85% and 15% of the required total loan amount). We want to deduct the loan interest of the loan allocated to the granny flat for tax purposes. Same question as in b) -> Does it matter that the granny flat did not exist as such at the time of purchase?

e) The attic’s condition is roughly estimated to be as of 1980. Should we have a residual value appraisal made in order to maximize depreciation (AfA) of the granny flat?

f) We intend to rent out the granny flat in the attic as a secondary residence to my parents. They live 4 hours away and currently stay in hotels when they visit us. We will conclude a rental contract at 70% of the local comparative rent and of course the amount will be transferred monthly. Even if it is not necessary(?), for the renovation of the house I would provide separate energy meters for the attic. Do we need to consider anything else?

3) Energy refurbishment: We understand that KfW funding is calculated per residential unit and that the granny flat in the attic is therefore also attractive for energy refurbishment. Do living areas or allocation matter for KfW loans?

Best regards,
Fam. Baum

a) Legally, at the time of purchase, the house is a single-family house without a granny flat. How do we maximize the chance of recognizing the attic as a granny flat? Are special formulations in the purchase contract helpful?

What is not, is not. It is a single-family house where a second kitchen and a bathroom have been installed upstairs. Nothing more and nothing less.

a) Do we need to apply for a building permit for that?

If you later create a granny flat, you probably have to apply for a change of use.

b) Does it matter for the deductibility of purchase costs that the granny flat did not yet exist as such at the time of purchase?

There is no granny flat, so you cannot deduct anything.

b) Is it a problem that the rooms are only called 'chamber' in the building application?

No. However, existing rooms or chambers in the attic are not automatically rentable units or a granny flat within the unit. Besides the access, you need, for example, a second emergency exit. The rooms must also be normally habitable (heating, ventilation, enough windows according to the definition of living rooms). One or two parking spaces must be provided according to the parking space regulation. And under the roof, it is not the floor area of a chamber that counts, but the actual calculated living space. You must be able to stand in it. I think to officially rent it out, it must be at least 25 sqm. If you rent out a condominium, then you have rental income. That income is taxable. I do not know the answers to all other questions.

So you want to buy a 220 sqm single-family house from the 1950s (which is already an unusual case) with a "separate" bathroom for a subtenant using two loans that, according to your logic, should be based on the virtual total size shares of the later residential units, main and granny flat, which have not yet been included in a declaration of division. My predecessor has already addressed the classic general aspects, to which there is practically nothing to add. Without details that make this case seem exceptionally hopeful, this all sounds to me like a top-quality harebrained idea. Furthermore, you want to write off the future granny flat right away because it is estimated to have building fabric newer than the rest, from around 1980. That also sounds illogical, even if you read the thought as that the "granny flat" is to remain in its current state and only the main dwelling parts of the building are to be brought up to the most modern standard(s). Thanks for the amusing bedtime story!

Without details that would make this case appear exceptionally hopeful, it all sounds to me like a harebrained scheme of the finest quality. Besides, you already want to write off the future granny flat because it has a younger building fabric from an estimated 1980 than the rest. That also sounds illogical, even if you read the idea as leaving the "granny flat" in its current condition and only bringing the main residential building parts up to the most modern possible standard. Thanks for the amusing bedtime story!

I rather believe it is about distributing the purchase price differently than the m², in order to generate more depreciation and more deductible interest expenses. Basically, it seems the OP has already familiarized himself with the subject regarding deductibility of mixed-use properties. This can be concluded from the separate loans, inquiries about wording in the purchase contract, etc. Whether this is also sensible with not yet existing granny flats would be a question for the tax advisor. Personally, I rather see a timely conversion with allocation of acquisition costs and financing costs, which of course does not exclude deductibility of the costs. This basically makes it easier, as presumably only one loan and no separate disclosure in the purchase contract is necessary. However, this eliminates the possibility of different equity usage with separate loans. However, renting must also be well thought out. There may be costs that make "renting" (whether genuine or not) unattractive. Additional garbage fees, possibly second residence taxes, can quickly eat up any possible tax advantage. Besides an additional door, possibly the construction of a second escape route, additional parking spaces, etc. might be necessary. Have you even calculated what result would come from 70% of the customary local rent minus interest expenses and minus depreciation on the granny flat (excluding land)? Is the whole effort even worthwhile? It should be noted that incidental purchase costs for the acquisition of the land count towards the basis for depreciation, so are only indirectly deductible. If there is modernization following the purchase, I recommend googling "15% limit for modernization," so as not to have a rude awakening. If a sale is planned or unplanned within 10 years, that could also be a case for a proportional speculation gain.

If the property is a single-family house according to the building permit from the 1950s and no building permit-required change of use to a two-family house has been approved so far, this is the legal use status under building law at which you can acquire the property. The sole decisive factor for this is the original building permit documents with the green stamp and a file number. Everything else that owners or brokers present to you has no legal relevance.

If, according to planning law and the development plan, up to two residential units are permitted, you can in principle consider a building permit-required change of use to a two-family house. For this, you must have the existing building inspected for suitability by an architect. An exclusion criterion can be, for example, that no enclosed staircase (first escape route) can be proven or subsequently created in the property from which the apartments can be accessed.

Furthermore, it remains to be examined whether the entry "Kammer" for the attic implies an already authorized residential use at that time. From building consultations on other properties, I know that such "Kammern" usually only mean partial residential use of the attic in connection with the apartment in the floors below, while the rest of the attic space is the classic attic. Thus, the complete development of the attic would also be a building permit-required change of use, which must also be checked in advance for principle feasibility by the architect/structural engineer (second escape route, building law-required staircase with a clear passage width of at least 80 cm, sufficient standing height, sufficient lighting, load-bearing ceiling above the upper floor for the conversion to living space, etc.).

Before the purchase, these points should definitely be examined by experts independently for you.

However, renting out also needs to be well considered.

The apartment is only supposed to be rented to the parents for visits. As far as I know, there is no obligation to use additional supply and disposal services if the household waste is sufficient for two people.