Saving taxes with real estate – In Germany, if you’re looking to invest in real estate, whether to buy a house or rent out a property, it is vital you get to know the tax system, its loopholes, and how to maximize profits when you invest. Familienstiftungen are an easy way to reduce your tax bill. Familienstiftungen are great, from tax-free capital gains after speculation tax to low, 15 percent taxation of rental income. How this works, how you can set up a foundation and how your grandchildren will profit from it, you will learn in this article. Back to German Real Estate Overview.
Additionally, in the following there may be slight grammatical errors, as this article was written by a German tax expert. This does not detract from the quality of information.
Procedure: Founding Stiftungen
Before we delve into the subject of Familienstiftungen (henceforth also called Family Foundations), let us first give a general overview of the topic of foundations. A basic insight into the definition, prerequisites such as assets and the process of formation, before we take a closer look at two subject areas: 1) foundations and real estate, and 2) family foundations. Let’s start with the question: What is a foundation?
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What is a Foundation? Easy Explanation
How does a foundation work? In general, a foundation is an institution that uses assets to pursue a defined purpose. The purpose is determined by the founder himself.
Any natural person over the age of 18 may establish a foundation, but also any purely legal entity and associations with legal capacity. Assets are, so to speak, the only requirement for establishing a foundation. In principle there are:
- Gemeinnützige Stiftungen (i.e. Charitable Foundations or Non-Profit Foundations)
- And there are other sub-forms, like the family foundations (further down)
What do Charitable Foundations do?
Before we now come to the family foundation. here once again the difference: Non-profit organizations are active in the church or pursue other, charitable purposes. For example, they award scholarships, support kindergartens.
Income from these activities in turn benefits these purposes (the foundation).
So if you had 10 million in your account, you could take 1 million and use it to set up such a charitable foundation. If you don’t have 10 million in your personal assets, check out AF Tax Coaching, where you can learn how to convert taxes into personal assets. That only at the edge!
Procedure of the Foundation: Purpose, Assets, Legal Form
First to the question: What kind of legal form is a foundation? There are two legal forms available to you as a founder when setting up a foundation. One is a foundation with legal capacity, called “rechtsfähige Stiftung”, the other is called a “treuhänderische Stiftung” (fiduciary foundation).
Variation 1: Founding a Rechtsfähige Stiftung
It acts independently, so it must also have a foundation board of directors that represents the foundation in all matters.
Variation 2: The Treuhänderische Foundation
Here you transfer the share capital to the trustee according to the contract. This trustee manages your assets separately from his own and according to the statutes of your foundation.
Once you have made your decision, the foundation phase comes.
The procedure for setting up a foundation is clearly regulated in Germany, like other legal forms:.
- Check requirements (purpose and assets)
- Choose foundation purpose
- Determine foundation assets
- Select foundation beneficiaries
- Select legal form
- Foundation business and statutes
- Recognition by the foundation supervisory authority and the tax office
- Transfer share capital
- Run a foundation
You now know the basics of the foundation.
A foundation pursues a specific purpose. It works with the assets provided by the founder (share capital). It can be independent or be managed in trust. So far, so good. Now we come to the exciting part: Real estate, tax optimization and family foundation.
Familienstiftung: Perfect Tax Optimization for Real Estate
You may have read our article on real estate tax optimization with an Immobilien GmbH, and wondering what the advantages of a Familienstiftung are. A family foundation is usually set up to build up assets. More explicit: for tax-optimized asset accumulation. But you can also use family foundations for tax optimization in real estate.
A quick example:
Capital gains are tax-free (after speculation period)
With a Familiensstiftung, you pay only 15% corporate tax on the rental of real estate
Erbschaftssteuer, Schenkungssteuer, income: Basically Tax Free
The founder and his children may each take one third of the proceeds. This means that two thirds of the profits are gone. What does that mean? Your charitable foundation is almost completely tax-free, as well as inheritance tax, gift tax and income. These taxes are critical to take into account, as they are a significant proportion of the additional costs you pay when buying a house in Germany.
A family foundation is usually founded by one person. The founder transfers his assets to the foundation. This in turn triggers the gift tax. However, in the foundation contract you have a tax-free amount.
Freibetrag bei Gründung: the Tax-Free Amount
The amount of the allowance depends on who is the beneficiary of the foundation. If your wife is the beneficiary, you would have a tax-free gift amount of 500,000 euros. If one of your children is a beneficiary of the foundation, the transfer is free of gift tax up to 400.000 Euro.
Important! this tax-free amount is only valid for the foundation. If you donate after the foundation has been established, the tax-free amount you can claim is only 20,000 Euro.
Remember this when founding:
- Transfer of assets upon incorporation
- Allowances up to 500,000 (spouse is beneficiary)
- Foundation after foundation with tax allowance of 20.000
Invest in real estate: Only 15% corporate income tax (rental income)
Once your assets are invested in your foundation, you can use and invest the existing assets.
Now comes the trick. A foundation is subject to corporate income tax. So you pay only 15% corporate income tax instead of trade tax.
You only pay trade tax with a family foundation if it is a business. However, the pure purchase, administration and holding of real estate is not commercial. You are only putting your assets to work. Don’t forget that you will still have to pay the Grunderwerbssteuer though.
Stiftung or GmbH?
Perhaps you will now say that I could also found a Vermögensverwaltende GmbH? Yes, but:
At some point you will surely want to sell one of the properties. This is exactly where the difference between a family foundation and a real estate GmbH arises.
If you sell a property through the GmbH, the profit from your sale is completely taxable, i.e. 15%, sometimes even 30%.
If you sell a property through the foundation, the capital gain is completely tax-free, as long as you have waited for the 10 year speculation period.
In order to slow down the price increase in the real estate market, the following simple regulation exists in legislation: If there is a period of at least 10 years between the purchase and sale of a property, the proceeds of the sale remain exempt from taxation. Thus, real estate investments should be of a long-term nature and short-term profit taking should be less attractive.
What if I Want to get Money out of the Foundation?
If you withdraw money from your family foundation, 25% capital gains tax is due. The same applies to withdrawals from a GmbH (distribution of profits). Who gets the money, i.e. who is the beneficiary, was already determined by you when you established the family foundation.
Advantages of the Family Foundation: Conclusion
So with a family foundation you combine the advantages of the Immobilien GmbH, with only 15% corporation tax on rental income and the tax-free capital gain (after speculation period), from the 11th year, as with private individuals, through the family foundation.
With this legal form you can therefore build up a tax-optimized and large real estate portfolio. The more favorable tax burdens let your stock grow faster, finally you can service liabilities faster and reinvest faster.
Best of all, you will receive 85% of your rental income after taxes, in addition to the tax-free capital gain after the speculation period.
Family foundations also have advantages for the next generations, your children and grandchildren. In case of inheritance, your shares will be divided equally under the first line of inheritance, that is spouse and your children. If they die, the foundation is passed on to the next generation.
Lastly, a little note for you:
More tax tips! Save Taxes like the Super Rich
My big goal for this and next year: I want to give you more tax tips for German real estate! It’s complicated and difficult to get into the real estate market when you don’t come from Germany. It’s even more difficult to understand how to invest properly, and stop wasting your money on paying unnecessary and unwatned taxes. We have a wealth of resources on tax optimiyation for real estate in Germany. From taxes for beginners to practical tax tricks, like US president pays $750 income tax and 1 billion block of shares almost tax-free. Save taxes like the super rich! Get to know the world of tax optimization together with me!