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HOLDING REAL ESTATE
Real estate tax
German property is subject to a real estate tax (Grundsteuer), levied annually. The tax base is the ‘assessed value’ (Einheitswert). The tax depends on several factors including location, size, use, local municipal coefficient, etc. Typically, for a 1 bedroom apartment in Berlin the tax will be in the region of 200-500 euro p.a. (Real estate tax is generally paid by the tenant.)
Rental income
Rental income is taxed as income (see section on Income Tax) and is subject to the progressive tax rate. Interest on loans provided to finance real estate, expenses and property related cost (eg.management fees, insurance, etc) can be deducted from the taxable rental income.
Depreciation
Real estate is subject to tax depreciation on an annual basis. (Land cannot be depreciated.) Buildings are depreciated over 40-50 years, depending on the year of construction. (2% annual depreciation applies to buildings constructed in/after 1925, 2.5% for buildings constructed prior to 1925.) This effectively lowers the annual tax payable in Germany.
Special rates apply to modernisation of listed (Denkmalschutz) buildings – modernisation costs can be depreciated over 12 years (9% p.a. for the first eight years and 7% p.a. in the next four years). Modernisation of not listed properties follows the standard depreciation rates.
BUYING AND SELLING REAL ESTATE
Transfer tax
Transfer of German property is subject to a transfer tax (Grunderwerbsteuer) – equivalent of stamp duty – levied at a rate of 3.5% (of the purchase price). It is generally paid by the buyer.
Capital gains
Currently profits made on sales of properties held as a private asset are not taxed if the property has been held for over 10 years. However, there are plans to introduce a (20%) capital gains tax in the coming years.
MOST COMMON LEGAL FORMS
Property investors typically choose one of the following legal forms in which to own German real estate: individual ownership, partnership under civil code, limited company. A partnership is not taxed as a separate legal entity, each partner is liable to pay tax on his share of income from the property according to his individual tax status. While a partnership is easy to establish and handle, a limited company will, due to the formal procedures, incur higher costs (of notaries,accounting) and commercial tax obligations.
NOTES
Germany has concluded double tax treaties with all of world’s developed economies. Sources: PriceWaterhouseCoopers; Stb D. Rot; Bundesfinanzministerium
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