Real Estate Taxes Germany – How To Save Money on Property Investment

Germany – Buying real estate in Germany requires an understanding of its tax system. Here we give a detailed, simple guide for people not from Germany looking to buy property, rent property, or invest in real estate in Germany. The German system is quite different from those found in US states. If you’re looking to buy real estate in Germany, you should be sure to understand the system yourself, and tailor it to your needs. The less taxes you have to pay to the tax office, the faster your private wealth will be built up. We give an easy-to-understand guide for the basics and fundamentals about additional purchase costs in Germany, Grunderwerbssteuer (the German real estate transfer tax) and legal forms like “Immobilien GmbHs” and “Familienstiftungen”. 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.

Real Estate Sale & Purchase: Tax for House & Apartment

Depending on the situation, different taxes can be incurred when buying real estate. Taxes are levied at both federal, state, and local level. Therefore, the regulations also differ at federal, state or local level, and differ both in the basis of assessment and in the amount of tax rates and contributions. For the sale or buy of a house, an apartment, a multi-family house or just land.

Examples of real estate taxes:

  • Real estate transfer tax (GrESt)
  • Land tax (GrSt)
  • Speculation tax
  • Inheritance tax (ErbSt)
  • Gift tax (SchenkSt)
  • Turnover tax (VAT) & Trade tax (GewSt)

Real Estate Transfer Tax (GrESt): Change of Ownership of Real Estate & Land

The real estate transfer tax is a legal transaction tax, the one-time levying of which is usually triggered by the purchase of a plot of land or real estate. It is levied on the basis of classic purchase contracts as well as in the case of land exchange, contracts or divisions. Furthermore, changes of ownership within the meaning of real estate transfer tax can lead to a tax levy as a result of transfers as well as highest bids in compulsory auctions.

Trigger for tax levies on the basis of GrESt:

  • Assignments
  • Performance bids in foreclosure auctions

Tax Rates According to Federal States: Bavaria & Saxony with low tax rate of 3.5 percent

The tax rate is set nationwide and ranges – as of 2020 – between 3.5% and 6.5% of the purchase price. The basis of assessment is the purchase price as certified by a notary – it is multiplied by the country-specific tax rate to determine the amount of tax payable.

Current tax rates 2020 (lowest first):

  • Bavaria: 3.5 %
  • Saxony: 3.5 %
  • Hamburg: 4.5 %
  • Bremen: 5.0 %
  • Lower Saxony: 5.0 %
  • Rhineland-Palatinate: 5.0 %
  • Saxony-Anhalt: 5.0 %
  • Hessen: 6.0 %
  • Mecklenburg-Western Pomerania: 6.0 %
  • Brandenburg: 6.5 %
  • North Rhine-Westphalia: 6.5 %
  • Saarland: 6.5 %
  • Schleswig-Holstein: 6.5 %
  • Thuringia: 6.5 %

Tax Debtor, Tax Bearer & Tax Exemption – Nearest Relatives & Partner

In principle, buyers and sellers are equally affected by the tax liability. Usually, however, the payment obligation is transferred to the real estate buyer. In the course of settling the tax liability, the taxpayer receives a so-called clearance certificate from the tax office, which serves as the basis for the legal registration of the new owner in the land register.

Under certain conditions, the Real Estate Acquisition Tax Act (GrEStG) allows an exemption from the required one-off payment. This applies, for example, to property sales to family members in a straight line and spouses/life partners within the partnership or during the divorce or annulment process. Also exempt from the real estate transfer tax are real estate or plots of land with a maximum purchase price of 2,500 €.

Conditions for tax exemption:

  • Parents and children or grandparents and children (kinship grade I)
  • Spouses or registered partners
  • Real estate/properties up to 2.500 € purchase price

In the case of taxable inheritances and gifts, the real estate transfer tax is completely waived in order to avoid double taxation.

Property Tax (Grund Steuer; GrSt) – Valuation, Tax Rates & Hebesatz

The property tax is a municipal tax, which is paid annually to the respective municipality in case of real estate ownership. A distinction is made between real estate tax A – agricultural – and real estate tax B – construction – since a special assessment rate applies to property used for agricultural and forestry purposes.

Assessment Basis, Valuation & Real Estate Tax Collection – New Reform 2024

Two laws are used to determine the value of taxable property: the Property Tax Act (GrStG) and the Valuation Act (BewG). The values necessary for the calculation of real estate tax are currently being reformed due to obsolescence and will be replaced by new values. This process should be completed by the end of 2024.

The first step will be for the state tax office to determine a value using the so-called capitalized earnings method. This involves both the actual value of the land and the type of development, location and size of the property.

Secondly, the value is multiplied by the corresponding tax index, which is directly related to the respective real estate object. For example, a flat rate of 6.0 per mille is calculated for agricultural and forestry property, whereas the per mille rate for building property is between 2.6 and 3.5.

Overview of tax rates by type of property:

  • 6.0 per mille for agricultural property
  • 2.6 per mille or 3.5 per mille for single family houses
  • 3.1 per mille for two-family houses
  • 3.5 per mille for the remaining building property

The final property tax is then calculated as the product of the property tax assessment issued by the tax office and the property tax rate. The rate of assessment is set by the municipality and is usually valid for a period of one year.

Tax debtor, Tax Bearer & Tax Exemption – Installment Payment, Own use & Third-Party use of Real Estate

As a rule, the tax debtor is the owner of the property – and in the case of own use – the resident. After appraisal and assessment, he receives a corresponding tax assessment from his municipality, which is binding for at least one calendar year. The legal owner at the time of 1st January of each calendar year is therefore considered to be the tax debtor, even if he/she resells the property in the meantime. Private law settlements can of course be made in favour of the real estate seller.

The payments concerning the property tax are generally made in four instalments per year, on 15 February, May, August and November. With small payment amounts between 15 € and 30 € half-yearly rates – in each case to 15 February and August – are usual, whereas with tax payments under 15 € annual rates to 15 August are felt as sufficient.

Installment payments of the property tax:

  • Taxes > 30 €: quarterly (on 15.02., 15.05., 15.08. and 15.11.)
  • Taxes 15 – 30 €: half-yearly (to 15.02. and 15.08.)
  • Taxes < 15 €: annually (15.08.)

In the case of rented real estate objects, however, the charges can be passed on to the tenant(s) as apportionable service charges, provided that a corresponding contractual agreement has been reached in advance. Should a loss of rent through no fault of one’s own arise over large amounts, it is possible to submit an application to the local authorities for real estate tax remission.

Property owned by public authorities, church property and property owned by non-profit corporations are completely exempt from property tax.

Speculation Tax – Private Sales Transactions for Real Estate

The speculation tax is a tax which is imposed on a real estate salesman with private sales transactions according to nationwide regulation. In accordance with the German Income Tax Act (EStG), taxation is levied on all income resulting from private sales, with the exception of owner-occupied real estate.

Applicable Area & Due Date – Letting, Undeveloped Land, Heritable Building Rights & Co

Taxes must be paid on the sale of rented apartments and houses as well as on undeveloped land and further in the case of hereditary building rights. Also affected by the speculation tax are shares in closed real estate funds and further co-ownership shares.

Scope of the speculation tax:

  • Letting of apartments & houses
  • Undeveloped land
  • Leasehold cases
  • Shares in closed-end real estate funds
  • Shares in co-ownership

The due date is the year of sale. The amount of tax payable is determined individually by the federal states and is based on criteria such as appreciation in value and the seller’s income tax rate, but may be reduced by certain expenses.

These include, for example, profit-reducing modernization costs – to the extent that they exceed 15% of the original acquisition cost -, certain advertising expenses, and brokerage and notary fees. By means of cleverly arranged installment payments, it is sometimes possible to take advantage of tax-free allowances to reduce contributions.

Reduction of speculation tax charges:

  • Modernization costs > 15 % of acquisition costs
  • Advertising costs
  • Brokerage fees

Speculation Period – 10-year Period & Three-Object Limit for Real Estate Sales

The speculation period is 10 years. This means that all sales transactions under private law are exempt from speculation tax after this period. If, on the other hand, the apartment or house is temporarily used by the owner, the 10-year period can be circumvented and reduced to two to three years.

This is always the case if the real estate object was exclusively used for the own residential purpose in the year of the sale as well as the two preceding years – even in the case of owner-occupied second homes or vacation homes. As long as a real estate owner can prove that he receives child benefit for his children, their private use is also regarded as “own residential purpose” of the taxpayer.

If a total of more than three property sales are made in a five-year period and the three-object limit is thus exceeded, the sales are considered by law to be commercial transactions and are therefore automatically subject to trade tax.

Inheritance tax (ErbSt) – Property Valuation & Tax Allowances

Inheritance tax always comes into effect when a deceased leaves an inheritance which is accepted by the beneficiaries.

Assessment Basis & Taxes – Inheritance Taxes According to the Market Value on the Balance Sheet Date

In contrast to foreign states, the federal regulations define the inheritance tax here not as estate tax, but as inheritance accrual tax, which means that the tax charges are generally levied in relation to the specific amount of the inheritance. An extended tax liability ensures that beneficiaries do not benefit from migrating abroad in case of inheritance.

The German Real Estate Valuation Ordinance (ImmoWertV) provides a valuation based on comparative value, income value or real value methods. For real estate inheritances, the valuation is based on the current market value on the reporting date, i.e. the value that could have been achieved for the property in an immediate sale on that day.

In the case of leased properties, a flat tax valuation discount of 10% is applied, whereas 100% of the market value of non-leased properties is included in the valuation.

Assessment basis according to ImmoWertV…

  • Rented properties: 90% of the market value
  • Non-leased properties: 100% of the market value

The valuation report can be tax deductible as additional inheritance costs.

Tax Allowances & Tax Remission – Degrees of Relationship of the Heirs to the Testator & own use

The amount of the inheritance tax can be reduced by certain allowances. These are based on the respective degree of kinship between a beneficiary and the deceased.

Tax-free amounts according to the degree of kinship:

  • 500.000 € for spouse / life partner
  • 400.000 € for biological children, stepchildren, adopted children and surviving grandchildren
  • 200.000 € for grandchildren
  • 100.000 € for parents and grandparents
  • 20.000 € for all other heirs (related and unrelated)

Law of the case, if the deceased was living in a property used by himself before his death and his heirs use this property for their own residential purposes for at least ten consecutive years after the occurrence of the inheritance, the inheritance tax is discharged. In the case of an early departure, however, subsequent taxation will take place.

Gift tax (SchenkSt) – Gift Contract & Tax Exemption

Gift tax is payable on assets that are given to the beneficiary instead of sale, loan or inheritance.

In the context of real estate gifts, the donors are often granted rights of residence and/or usufruct (use without altering). In these cases, a contract of gift is advisable, if necessary with an included right of reclaim, in order to avoid compulsory auctions or seizures in worst case scenarios. In the case of the guarantee of lifelong right of residence, a corresponding entry should also be made in the land register in order to provide clear evidence.

Tax-Free Amounts: Tax Remission – Degree of Relationship of the Beneficiaries to the Donor

Gifts to spouses or life partners are subject to complete tax exemption. This also applies if the partners are in the process of divorce or annulment, insofar as they still live together in the family home at the time of the gift.

The tax-free amounts in gift cases can be re-credited every ten years. In the case of parents, this is even possible twice. They differ with regard to the family relationship between the donor and the recipient.

Tax-free amounts according to family relationship:

  • 500.000 € for spouse / life partner
  • 400.000 € for children and surviving grandchildren
  • 200.000 € for grandchildren
  • 100.000 € for parents and grandparents
  • 20.000 € for all other beneficiaries (related and unrelated)

Claim for Compulsory Portion and Supplementary Claim in Case of Donation & Inheritance

In the event of exclusion of the inheritance, the deceased’s next of kin are entitled to a so-called compulsory portion, i.e. a claim for payment against the testamentary heirs.

According to the German Civil Code (BGB), gifts made by a deceased person in the last ten years prior to his or her death are counted as a supplement to the right to a compulsory portion for his or her heirs when the case of inheritance arises. In accordance with the meltdown model, the entitlements decrease from year to year and fall to zero percent from the eleventh year before the inheritance.

Gifts made within a marriage or registered civil partnership are entitled to a supplement to the compulsory portion without time limitation. However, the gift itself remains absolutely effective.

MwSt & Trade Tax: Commercial Real Estate Trade for Real Estate

The value added tax (MwSt) is passed on to the buyer and new owner at 19% of the purchase price in the case of commercial real estate sales.

The trade tax (GewSt) is charged to the real estate seller in the context of commercial sales transactions and is calculated individually on the basis of the capital gain. The share of profit corresponding to a tax rate of 3.5% multiplied by the municipal assessment rate results in the trade tax amount to be paid.

Trade tax amount = 3.5 % of the profit * assessment rate

Automatic Trade Tax Liability & Allowances – Partnerships, Natural Persons & Co

Insofar as the properties are business assets, the associated income from profits is generally subject to tax. If the 10-year period stipulated in the German Income Tax Act (EStG) with regard to speculation tax is not met, or the three-object limit is exceeded in the sale of real estate units, the corresponding income is also automatically subject to trade tax.

A property originally purchased as an apartment building, which is subdivided into several apartments in the course of a better letting, and resold within five years, therefore causes the same automatically generated tax liability.
Partnerships and natural persons are legally granted an allowance of 24,500 €. Other companies and associations can benefit from a lower tax-free allowance of 5,000 € under certain conditions.

Taxes when Buying / Renting Real Estate

Real Estate – What will you be confronted with when buying a house, a condo, a multi-family house or just land in Germany? It’s an attractive market for many, especially abroad for its strong economy and stable government.

If you’re still looking for areas to invest, or which to avoid, we have guides online.

The Fundamentals: Additional Costs when Buying Real Estate

Low interest rates, great loan offers and irresistible purchase prices entice one or the other to invest in German real estate, or move to the country. So, how do you start to deal enough with the  the additional costs that buyers and sellers expect when signing a purchase contract. Which additional costs arise when buying a condominium? How much percent when buying a house?

With the conclusion of a purchase agreement, the financing is already finished. However, the ancillary purchase costs are often underestimated. The bills from the broker, notary, land registry and tax office will come as soon as the loan is fixed. Because of this, the credit is often underestimated. Especially coming from abroad, these costs can be difficult to understand.

Grunderwerbssteuer: Real Estate Transfer Tax

In Germany, there is also a real estate transfer tax, just as in many other countries. This is called the “Grunderwerbssteuer”. It needs to be paid everytime a property or part of a property is purchased.

The Grunderwerbssteuer is a state tax. It is determined individually by each federal state (called Bundesland or Bundesländer). At present, it falls between 3.5% and 6.0%, depending on the location. The tax is levied on the basis of the Grunderwerbsteuergesetzes (GrEStG). The respective federal states therefore also decide how to apply it, and to what degree they pass it to lower levels of government.

Appraising Property: Reduce Service Charges + Investment Capital

The better the valuation of the property, the lower the service charges and transfer tax. Therefore, it is vital to get engaged with the valuation of real estate. This process is similar in Germany as in other countries, but the details make up the whole. In general, the difficulty in the appraisal process is the reason why many people hire real estate agents. If you accept a purchase price immediately, you will probably pay on top of it. This is not hard to accept, but if the purchase price is a 5-digit number, it quickly adds up.

These savings would be much better served paying for a renovation or modernization, for example with a new heating system, which you could have done in the repair or modernization. This would have two positive side effects:

  1. Reduction in purchase price through concrete points of criticism (e.g. building materials)
  2. Increase in value through renovation for resale

So not only do you pay less, you can also use the available assets to increase the value of your property. The more detailed you check the property, the more likely you are to minimize the purchase price. You can learn what is important when evaluating real estate in Germany here:

If you already have a specific property in mind, I recommend the individual articles on land, apartment, house and Co.

Taxes on Rental Income: GmbH or ‘Stiftung’

Taxes on rental income are definitely an issue for landlords. Private property ownership, ‘Immobilien GmbH’ (real estate company) or ‘Familienstiftung’ (Family Foundation)?

In order to tax your rental income as efficiently as possible – to begin with – the German state opens the possibility of founding a GmbH. A GmbH is a company, and with loopholes, you can found such a company to take care of income you make from renting out property. Yet, it may be even more profitable to found a Familienstiftung. How, when and why? Learn everything in the articles below.

Immobilien GmbH: Wealth Distribution Company

In this article you will learn the basics about the topic Immobilien GmbH. What is it? Is it the same as Vermögensverwaltende GmbH or Immobiliengesellschaft? When buying a house or a condominium, who comes up with the idea of founding a GmbH? Admittedly, it doesn’t make sense for self-interest, but it does if you’re looking to rent your property out.

By law, an immobilien GmbH is a company that pursues the purpose of letting, development, financing, realization or marketing. It is independent whether it concerns one or more properties. It also includes real estate management, for its own properties and those of third parties.

You may hear from some people:

Immobilien GmbH, Familienstiftung, isn’t that the same?

It’s true that there is little difference in legal forms between the two, looking at the purchase and taxation of your rental income. It does become interesting when selling real estate though. In the GmbH, the capital gain must be fully taxed. Now we look at the Familienstiftung though, where the sale is tax-free after a speculation period has expired.

Familienstiftung: Providing for retirement, Children and Almost Tax-Free

I repeat: Capital gain is fully taxed in an Immobilien GmbH. The real estate sale of a Familienstiftung is tax-free (after speculation period).

A Familienstiftung is in its essence a foundation intended to reach a goal. This can be a wealthy business mogul designating much of his funds to care for following generations, or a property investor intending to place the profits he made from renting out property in a foundation. In the following tax article we take a deep look into the subject of foundations, family foundations, real estate purchase, taxes and tax optimization. Setting up a foundation, especially a family foundation, has many advantages for you. 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.

Buying Real Estate in USA

What taxes do you have to pay when you buy a house, land or condo in the USA? If you’ve changed your mind, or want to rather look in the US, what their laws are, and how taxes function there, we have an extensive article for you.

The United States of America attracts real estate investors like no other country in the world. Especially California and especially Los Angeles, but also New York City are in focus. In addition, tens of thousands are looking for apartments, condominiums and houses because their career is moving to the USA. Silicon Valley, Wall Street, and more. Here, economic, political and cultural ideas are forged. Investing in the USA can therefore only make sense if the parameters are right.

For real estate buyers, however, the big question is how the tax system in the USA works. Together with our US real estate agent, we have written extensive articles on the subject of taxes in the USA. The first part can be found here:

View of San Francisco, with typical American skyline:

Real Estate Tax Deductions: US Tax System

Mortgage Credit? Property Taxes? Here we explain all the important terms that you will come across in the US real estate tax system. Here you will find simple instructions on how to reduce the purchase price you pay for your real estate or property in the USA: From tax credits to deductions and allowances. This tax guide gives you a quick and easy overview of what goes into your tax calculation and how you can legally reduce the taxes you pay.

Taxes on the Sale of Real Estate

Coming soon!