Sell apartment house: complete or each apartment separately?

When it comes to selling an apartment building, there are several ways to do it. One possibility is to sell the entire building as a unit. Another option is to divide the building into individual apartments and then sell them separately. Both options have advantages and disadvantages that must be considered when making a decision.

You have these two options:

1. Sell entire property
2. Sell individual apartments

In most cases, owners decide to sell the entire property.

Advantages & disadvantages of a complete sale of the property

If you decide to sell the entire apartment building, the sales process is much less complicated for a complete sale. After all, it is easier to find a buyer for a complete building than for several separate apartments. At the same time, complete apartment buildings are less in demand than individual apartments or single-family homes, since apartment buildings are usually only of interest to capital investors and investors.

However, selling the entire building can also fetch a lower price because the buyer bears the risk of taking on potential vacancies and rental problems.

Here are the pros and cons:

• Advantages: Easy & fast sale
• Disadvantages: Low retail price

Therefore it is worth dividing the apartment house

In comparison, dividing the building into individual apartments can increase the selling price. Since each apartment can now be sold separately, it may also be easier to find a buyer for it.

However, the disadvantage of this is that the division of the building into separate apartments may involve additional costs, such as the construction of partition walls and the installation of separate utilities. In addition, you should allow enough time in advance, as a division of the apartment building must be carefully prepared and processed.

• Advantages: Increased purchase price & many interested parties
• Disadvantages: Cost and time intensive

Even if a division into several apartments requires a lot of resources, it can be worthwhile to divide the house into several ownership shares. To ensure that this works smoothly, you have a few things to consider.

Divide apartment building into individual apartments

In order to divide the apartment building into individual apartments and sell them separately, you need to take certain steps. We will now take a closer look at how this works.

Certificate of Completeness by Building Inspectorate

If an apartment building is divided into several condominiums, a condominium owners’ association (WEG for short) is created. An important prerequisite for this is the existence of a certificate of self-containedness in accordance with the German Condominium Act (Wohnungseigentumsgesetz). This certificate is issued by the responsible building supervisory authority and confirms that the individual apartments are self-contained. This means that they have a separate, lockable entrance, their own ceilings and walls, and their own WC.

These conditions must be met for an apartment to be considered locked:

• Separate, lockable access
• Own ceilings & walls
• Own WC

Partition plan via architect or engineer

In addition to the certificate of separateness, you also need a partition plan of the entire building. This plan is an important part of the declaration of partition and shows how the building will be divided.

The most important information about the distribution plan at a glance:

• Is additionally required
• Shows division of the building
• Includes location & size
• Creation by architect or engineer

It must be prepared by a competent architect or engineer and indicate the exact size and location of each dwelling.

Notarization of the declaration of division

Once you have received the certificate of seclusion and the partition plan, you can prepare the declaration of division. This states that each owner will convert his or her property into co-ownership shares corresponding to the share in the entire residential complex. The declaration of division must be notarized to be legally effective.

Land register entry of the co-ownership shares

Finally, you must make the entry in the land register to secure the co-ownership shares. This is usually carried out by a notary, who draws up the title transfer deeds and applies for the entry at the relevant land registry office.

Once this step is complete, you can sell the apartment in question. But what happens to the tenants after the sale?

This is what needs to be considered: Right of first refusal for tenants

If you convert an apartment building into individual condominiums and sell them, you must bear in mind that the current tenants have a right of first refusal. This means that the tenants have the opportunity to purchase their current apartment on the same terms as agreed in the purchase contract between you and another buyer. The right of first refusal serves to provide the tenants with a certain degree of security and to ensure that they cannot be kicked out of their apartment without further ado.

However, it is possible that the tenant will not exercise his right of first refusal. In this case, you can sell the apartment to another buyer who is willing to fulfill the conditions of the purchase agreement.

Protection against dismissal when selling a house

In addition, according to the German Civil Code (BGB), the buyer is bound by the existing leases. This means that tenants retain their leases even after the house is sold and do not have to fear that they will be terminated.

So if you intend to sell the individual apartments in the apartment building, you must observe a notice lock-up period of at least three years. During this time, the new buyers cannot simply terminate the rental agreements.

Tip: To avoid potential conflicts between buyers and tenants when selling a house, you should include binding regulations in the purchase agreement. These regulations should refer to outstanding rent claims, operating cost payments and deposit repayments.

In summary:

• Buyer is bound by existing leases
• Termination of tenants after sale not possible
• Termination lock period of 3 years
• Tip: Record all formalities in the purchase contract

Conclusion: multi-family house apartments for sale individually

The decision whether to sell the apartment building as a whole or divided into individual apartments depends on various factors, such as the condition of the building, the location and the demand for housing in the area. If you decide to divide the apartment building into individual apartments and sell them, you can look forward to high sales prices. At the same time, it is important to consider both the tenants’ right of first refusal and the protection against dismissal.

Rental yield: definition & calculation

Should you decide on a yield property for your real estate investment, the question quickly arises:

Is this property worthwhile as an investment?

After all, buying real estate does not only entail immense costs at the beginning. There are also ongoing operating costs to be paid later on during the rental period. So to make sure that this expense is worthwhile, there is the rental yield. In other words, the rental yield puts your investment in relation to the potential rental income.

Formula for gross rental yield: percentage

To calculate the rental yield, the cold rent (without operating costs) and the purchase price of the property must be put into relation. The complete formula is:

Annual net income / investment * 100 = rental yield

The result is then in percent. The higher the percentage, the better the return. And the better the return, the more you earn from the property. As a real estate investor, you should ideally build up wealth again directly so that you can then invest it in further real estate as a capital investment.

Yield & location: A, B & C location

The decisive factor for the rental yield is the location of your property. Is the property in an A, B or C location? What about the macro and micro location? And is it a yield or investment property? Depending on the location, the respective property types have different rental yields.

A-location: Frankfurt & Munich

Typical for A-locations are low yields and a steady increase in value. Over the long term, therefore, rental yields rise here just as the value of the property itself does. The best examples of this are top A locations such as Munich and Frankfurt:

• Munich Ø Yield ~ 3
• Frankfurt Ø Yield ~ 4

B-location: Dresden & Nuremberg

In principle, B locations also have good returns. In addition, there has also been a significant increase in value here. The ideal rental yield in B locations is between 5 and 6 percent:

• Dresden Ø Yield ~ 5
• Nuremberg Ø Yield ~ 6

C-location: Wuppertal, Chemnitz, Krefeld

Gross rental yields are highest in C locations. On the other hand, there is no increase in value and the risk of vacancy is higher. Here are some examples:

• Wuppertal Ø Yield ~ 7
• Chemnitz Ø Yield ~ 8
• Krefeld Ø Yield ~10

Conclusion: What is the minimum rental yield?

The amount of the rental yield is therefore calculated according to a fixed formula and varies depending on the location and type of property. In principle, the higher the yield, the more profit is made. And the better the location, the lower the yield. Thus, yield properties are worthwhile above all in B and C locations, while you should choose properties in A locations above all for investment properties.

Learn more about rental yield here:

• Rental yield: Return on real estate (external)

If you want to learn even more on the subject of buying a property, whether owner-occupied or capital investment, numerous articles, guides on the subject of rented vs unrented, as well as checklists, all free and 24 hours online available, with us!

Apartment, house, apartment building, everything for real estate beginners!

Now new on Immobilien-Erfahrung.de:

• Buy property: learn – external

Real estate company: Founding a company

Do you want to buy and rent out your first property? You have inherited a property and now want to work in real estate management, property management and other related areas yourself, or even more, you want to become a real estate investor yourself? Then the big question is, which company is the right one? What is the first step?

Basically, you have many different possibilities and options as to how you can set up your business for the future. To give you an initial overview, we have written this guide to the different types of companies for you. Here you will learn about the different options you have as a founder in the USA. Definitions, start-up tips, advantages, disadvantages and taxes. Everything you need to make a good decision.

Legal forms USA – Overview

• LLC (cf. GmbH)
• Limited partnership (cf. limited partnership)
• General partnership (cf. general partnership)
• Real Estate Limited Partnership (cf. Immobilien-KG)
• C Corporation (cf. stock corporation)
• S Corporation (cf. small stock corporation)
• Real Estate Holding (cf. Real Estate Holding)
• REIT/ Real Estate Investment Trusts (cf. real estate investment company)

Combine legal forms:

• Multiple Entities

For the sake of completeness:

• Sole Proprietorship (cf. sole proprietorship)
• Owning private real estate in the USA (cf. private real estate ownership in Germany)
• Tenancy in Common (TIC) (cf. fractional community)

Limited Liability Company (LLC)

An LLC (Limited Liability Company) is a flexible and popular legal form in the USA. It offers its owners the advantage of limited liability, similar to a corporation, but combines the tax advantages of a partnership. Profits and losses are attributed directly to the shareholders, which avoids double taxation. In addition, an LLC offers a simple structure and flexibility in administration, which makes it particularly attractive for small companies.

• LLC

LLC: My recommendation for the first 10 properties

For the first two to ten properties, an LLC (see GmbH in Germany) is best suited to minimize liability risks and at the same time take advantage of tax benefits. The LLC limits the personal liability of the owners, while profits and losses are attributed directly to the shareholders, which avoids double taxation. In comparison, a Limited Partnership (see KG) offers more flexibility in terms of passive participation, but the general partner bears full liability. A general partnership (see OHG) involves higher risks due to unlimited liability.

• More about the LLC

Limited Partnership

A limited partnership consists of at least one general partner and one limited partner. The general partner bears full liability for the company’s debts, while the limited partner is only liable to the extent of their contribution. This structure is often used in equity investment or real estate projects, as it enables a clear separation between active and passive participation. From a tax perspective, a limited partnership benefits from the fact that profits are only taxed at partner level.

• Limited Partnership

General Partnership

A general partnership is a partnership in which all partners have unlimited liability. This legal form offers flexibility and simple formation without major formalities. Profits and losses are attributed to the partners and are taxed personally by them. However, the partners’ full liability for the company’s debts entails a higher risk, which is why this form may be less suitable for certain business models.

• General Partnership

Real Estate Limited Partnership (RELP)

A real estate limited partnership (RELP) is a special form of limited partnership that is used for real estate projects. In this structure, passive investors invest as limited partners, while the general partner takes over the operational business and has unlimited liability. RELPs offer the advantage of tax transparency and are particularly suitable for large real estate investments where the parties involved want clear liability and profit relationships.

• Real Estate Limited Partnership

C Corporation

A C corporation is an independent legal entity that is separate from its owners. It offers a comprehensive limitation of liability for its shareholders. Profits are taxed at the corporate level and distributions to shareholders are subject to personal income tax, which can lead to double taxation. Nevertheless, this legal form offers advantages such as access to capital markets and the possibility of having an unlimited number of shareholders.

• C Corporation

S Corporation

The S Corporation is similar to the C Corporation, but with the difference that profits and losses are passed on directly to the shareholders, thus avoiding double taxation. However, there are restrictions on the number and type of shareholders. This legal form is often chosen by smaller companies that want to benefit from tax transparency but at the same time need the limited liability of a corporation.

• S Corporation

Real Estate Holding

A real estate holding company is a type of company that is used specifically for the ownership of real estate. This structure provides legal and tax separation between the owners and the property owners. It is ideal for investors who own and manage several properties without holding them directly in their own name. This allows liability risks to be reduced and tax advantages to be exploited.

• Real Estate Holding

REIT (Real Estate Investment Trust)

A real estate investment trust (REIT) is a special type of company that invests in real estate and is traded on the stock exchange. Investors can acquire shares and thus invest indirectly in real estate without owning real estate directly. REITs are tax-privileged, but must distribute a large part of their profits to shareholders as dividends. They are a popular option for investors looking for a liquid and diversified investment opportunity in the real estate sector.

• REIT

Multiple Entities

The combination of several company forms offers entrepreneurs the opportunity to spread risks and maximize tax advantages. For example, an LLC can be used in conjunction with a corporation to separate operational and administrative functions. This is particularly useful in the real estate industry or for more complex business models where different business areas need to be legally and fiscally separated.

• Multiple Entities

Sole Proprietorship

Sole Proprietorship, also known as a sole proprietorship, is the simplest legal form in the USA. The owner bears sole responsibility for the business, but also has unlimited liability for its debts. This form is suitable for smaller companies or freelancers who do not require a complex structure. As there is no separation between the company and the owner, taxation is levied directly on the owner’s income.

• Sole Proprietorship

Owning private real estate in the USA

Direct ownership of real estate in the USA as a private individual offers both opportunities and risks. Owners benefit from the increase in value of the property and the rental income, but must also observe the tax and legal obligations. In addition, personal ownership of real estate can lead to liability risks, which can be minimized by using a suitable legal form such as a real estate holding company or an LLC.

• Owning private real estate in the USA

Capital Gains Tax – Detailed Guide and Simple Explanation

This is the basic basic guide you could hope to find on capital gains taxes. Capital gains taxes are incredibly important to understand on your way to extending your portfolio, improving returns, and minimizing your tax expenditure beyond income tax. Capital gains tax are often confused for dividends tax, but this common misconception is one of the many basic steps in this simple explanation guide. First, we go through what capital gains even are, and then continue on to how capital gains are taxed. Capital gains taxes also form one half of the two types of dividends taxes!

Capital Gains Explained – Investment Basics

Capital gains sounds like the best and most confusing financial term you could come up with. It has connotations of wall street and Gordon Gekko, villas in the Hamptons, and invetment portfolios worth millions. Let us take you on the journey of capital gains (and capital losses), and what you need to know about them. You may come in contact with capital gains taxes as part of the dividends you receive, from mutual funds, or from other forms of finances or investment strategies and portfolios.

Capital Gains Definition: What is Capital Gains Income?

By definition, a capital gain is when capital becomes more valuable. This capital is capital asset, and most typically in the form of stocks. Usually the capital gains or losses occur when selling an asset (such as stock in a company). A capital asset, i.e. the thing gaining in value, is also often called a security. Capital assets can occur in the form of stocks, funds, real estate investments, or any number of investment portfolios

• A capital asset which has increased in value since purchase

What are Examples of Capital Gains? How Capital Gains work

Let’s take the example of a real estate investment. You buy an apartment in New York for $300.000. It was in a particularly up-and-coming neighborhood, and now five years later it’s worth $400.000. At this point it is an unrealized capital gain of $100.000. If you decide to sell this apartment, and you get your asking price of $400.000, you will have made $100.000. This is your realized capital gain.

$400.000 – $300.000 = +$100.000 Capital

Now let’s say you decided to invest in a neighborhood which did not fare so well over the years. Suddenly your apartment did not increase in value to $400.000, but rather decreased in value to $250.000. Then you will have unrealized capital loss. If you decide to sell this apartment (perhaps to avoid further depreciation in value), you will have a realized capital loss of $50.000.

$250.000 – $300.000 = -$50.000 Capital

What Counts as Capital? Capital Asset Definition – Dividends, Stocks, Co

To understand what a capital gain really is, it is important to understand what things count as capital themselves, what is the thing gaining in value when we speak of capital gain. Looking at regulations, capital assets are defined as a piece of property which has significant value. That means a quilt given to you by your grandma for free, which you sell for $15, is not a capital gain. Still, capital assets are more far reaching than most people often think: it’s not just related to stocks, but it’s also relevant to dividends, mutual funds, and more. These are all types of capital assets:

• Property, e.g. real estate
• Jewelry, Collectibles, or Art
• Stocks
• Bonds
• Investment Properties

What is the Difference Between Realized Capital Gains and Unrealized Capital Gains? Paper Gains, Paper Losses

Capital gain is, as defined above, just an increase in the value of an asset. This increase in value can occur any time of course, and usually happens a tiny bit every day. A capital gain can therefore occur anytime, but if the asset’s owner were to never sell, then this increase in value would be irrelevant. This type of increase in value, where the owner does not sell, but if he were to sell, he would sell it for a higher price than he bought it, is called unrealized capital gain or paper gain. The increase in the assets value is not transferred to real in-pocket-money, and rather only occurs on paper. A realized capital gain is when the owner ‘cashes out’ and sells his assets for more money than purchased.

• Realized gain is when asset increases in value and is sold
• Unrealized gain (or paper gain) is when the asset is not sold, but would incur capital gain if sold

What Types of Capital Gains are There? Short-Term, Long-Term

Typically you differentiate between short-term and long-term capital gain or loss. As mentioned above, when you own capital it typically changes in value. If you hang on to this capital for less than a year before realizing your gain (i.e. before selling), it is a ‘short-term capital gain’. If, on the other hand, you have owned this capital for longer than a year when you sell it, it qualifies as a ‘long-term capital gain’. These distinctions are quite important because they decide how the profit you make from your investment is taxed.

• Short-term capital gain is when you sell after owning the capital for less than a year
• Long-term capital gain is when you sell after owning the capital for more than a year

How is the Value of Capital Calculated? Details, Explanation, Example

Some capital assets are more straightforward to calculate than other. For example, buying 10 stocks at 30$ a share is quite simple to calculate because the total value of the capital is at 10 x $30 = $300. Other capital assets are much more complex. Take for a example a property, where the land is worth $30.000, and the land owner also builds a dock with a boat. Now the total construction of the dock cost $50.000, and the boat cost $20.000, but the transport of the materials for the dock cost $8.000 and for the boat an extra $2.000. That means the current value of the items is at

$50.000 + $20.000 = $70.000

Yet, when looking at the value of capital such as this, all costs are factored in, which means that for example transportation costs would also be included, leading to a total capital value of

$70.000 + ($8.000 + $2.000) = $80.000

This example demonstrates that the value of capital is desided by all costs (including e.g. insurance costs) in the acquisiton of the asset. In the eyes of the IRS, these are also called capital expenses. By the way, if this scenario took place in Florida, there would be the addition of the documentary stamp tax (Florida’s version of the real estate transfer tax), one of the real estate purchase taxes, and the owner would have to pay the state of Florida property taxes.

What is a Capital Gain Tax? Rates, Long- and Short-Term, More

So we’ve gotten to the heart of what capital gains and losses are, how they are categorized and how to calculate them. Only thing left now is to understand how to tax them. This is probably easier than you imagine, but harder than it should be

Capital Gains Tax Definition: What is Capital Gains Tax?

Capital gains tax is a tax on the profit you make with investment in capital assets. If you buy stocks and sell them for more money than you bought them, you have made profit (i.e. capital gains), and this extra money that you are receiving is taxed. If you sell capital for more than you bought it, you will necessarily, by law, pay capital gains tax.

• Tax on investments which gained value, e.g. stocks that grew

Capital Gains Tax Example Calculation – How Capital Gains Tax Works, Formula

So, let’s say you are filing your taxes. For the past two years you have held some stock in a great company, but now are looking to buy a new car. You sell your stocks for $10.000 more than you bought them for. That means you have realized capital gains of $10.000. Because you held these for longer than a year, you will be taxed at the capital gains tax rate. Also, because you are not married and do not have a partner, you are filing single. For a single filing, below $40.000, there is a 0% tax rate. Great! So on this capital gain you will pay no taxes!

$10.000 x 0 = $0

Now, what if you held on to the same stocks for another year, and then decide to sell them. In this time they gained so much in value that you realize a capital gain of $60.000! Now you will be in a higher tax bracket, that means that you will have to pay some taxes. For capital gains tax rates (see the full details below), the second bracket starts at $40.000 in capital gains. That means you will have to pay 15% tax on the $20.000 which exceed $40.000

($40.000 x 0) + ($20.000 x .15) = $3.000

That means you will have to pay $3.000 in capital gains taxes from your $60.000 realized capital gain.

Are Short-Term Capital Gains Taxed Separately from Income? How Capital Gains Taxes Work

Although, it is important to distinguish taxes on capital gains and capital gains taxes. The capital gains tax only applies to long-term capital assets (i.e. owned for longer than a year), while short-term capital assets are taxed as if they were normal income, at the income tax rate like the salary you receive from work. Capital gains tax rates are lower than income tax rates!

• Short-term capital gains are taxed using income tax rate
• Long-term capital gains are taxed less with capital gains tax rate

When do you Have to Pay Capital Gains Tax?

This is a good question. If you hang on to good stock for 20 years you will continually be becoming more and more wealthy, yet are not paying taxes… right? Yes! You pay taxes on capital gain when this gain is realized. This is what’s called a ‘taxable event’. That means when the event (i.e. selling your capital) occurs, you pay taxes. If you never sell your capital, you won’t have to pay taxes on it! Your tax bill is never affected by unrealized capital gains or losses.

Do you have to Pay Tax on Capital Losses?

No! You do not have to pay taxes on capital losses, because you are not making any money. Quite the opposite, you can deduct capital losses from your tax bill. This is one of the most important ways to reduce your taxes. More on that below.

• You do not have to pay tax on capital losses
• You can deduct capital losses from your tax bill

Capital Gains Tax Rates – USA

The USA has a federal capital gains tax, but also many states have their own capital gains tax rates. That means you have multiple stops that your capital gains will be taxed at.

USA – Federal Capital Gains Tax Rates List, Brackets

For the federal level, your capital gains are taxed at the following rates if you are filing single

• 0% tax: <$40.000
• 15% tax: $40.001 – $441.450
• 20% tax: >$441.450

How much is Capital Gains Tax in New York? Rates, Brackets, List

The state of New York has no free-standing capital gains tax rate. Here, long-term and short-term capital gains are equally taxed using the state’s income tax rate. Just like New York property tax rates, the income tax rates are relatively high, but see for yourself. In New York capital gains are taxed at these rates:

• 4% tax: $0–$8.500
• 4,5% tax: $8.501–$11.700
• 5,25% tax: $11.701–$13.900
• 5,9% tax: $13.901–$21.400
• 6,33% tax: $21.401–$80.650
• 6,57% tax: $80.651–215.400
• 6,85% tax: $215.401–$1.077.550
• 8,82% tax: $1.077.551 +

How much is Capital Gains Tax in California? Rates, Brackets, List

Just like the state of New York, California also has no free-standing capital gains tax rate. Here, long-term and short-term capital gains are equally taxed using the state’s income tax rate. California income tax rates are also quite high, thanks its mega metropolises Los Angeles and San Francisco housing some of the biggest companies in the world. In California capital gains are taxed at these rates:

• 1% tax: $0-$8.809
• 2% tax: $8.809.00-$20.883.00
• 4% tax: $20.883-$32.960
• 6% tax: $32.960.00-$45.753
• 8% tax: $45.753-$57.824
• 9,30% tax: $57.824-$295.373
• 10,30% tax: $295.373-$354.445
• 11,30% tax: $354.445-$590.742
• 12,30% tax: $590.742-$1.000.000
• 13,30% tax: $1.000.000 +

How to Avoid Capital Gains Tax – Saving Money with Deductions

If you are receiving dividends, you probably want to pay as little as possible in taxes. Giving away money that you have invested and worked for seems harsh. Better to structure your taxes better and save money. Maybe not save money from your dividends taxes, but just give less away.

Best Trick for Real Estate: How do I Avoid Capital Gains Tax on Property?

You pay no federal taxes on qualified dividends when your total income is below $39.375! That means if your income is higher, suddenly you have to pay more taxes, and will end up with less money in your pocket in the end. In this case you could actually save money by just working less so as to avoid reaching the point where you have to pay the dividends or capital gains taxes. Remember: This only applies to the federal capital gains taxes.

• No capital gains tax when income is below $39.375

Looking for more ways to save on your tax bill, check out our top tips!

Real Estate Tax Deductions

Tax Deductions for Companies! Capital Expense Deductions

Important in the topic of capital gains, are the fact that acquiring capital assets is incentivized by the state. That means that if you are clever enough to form an LLC or an S corp, you can write off big purchases such as machinery, property, or other items which can count as capital assets. Remember though! Most expenses have to be written off over time, if you buy a car for your business, you cannot deduct the full price of your tax bill in one go.

• Capital expenses can be deducted from tax bill

How to Save Taxes with Capital Losses – What to do when Capital Loses Value

If your investment has lost value, it may hurt at first. This is normal though, and isn’t as bad as you first thought perhaps. This is because you can deduct capital losses from your tax bill. That means you pay less taxes because your investment did not turn out well! Only one catch, while you have to pay taxes on capital gains for all types of assets (e.g. even jewelry), you can only deduct capital losses when you bought your asset for investment purposes. For example stocks, property, etc. are all purely investment, and therefore can be deducted when losing in value.

• Deduct capital loss from tax bill
• Only possible for assets purchased for investment

How to Offset Capital Losses – Capital Gains Tax Explanation, Example

If you have made a significant capital gain in a year, but also capital losses (which, let’s be honest is quite common and to be expected), then you can write off the capital losses. For example, if you have made $200.000 in capital gains over some particularly lucrative stock, but have also made $100.000 in losses from a particularly poisonous investment, then you only need to pay taxes on the $100.000 of profit you made on the first. This is why it is called offsetting, because you offset some of the gain you make with the losses.

• Reduce your capital gain by the amount you lost through your capital losses

Tax Special! Income Tax

To learn about dividends tax means to learn about income tax as we’ve learned. That’s not a problem though because we have a simple guide for learning about income tax for the very beginners. It is a simple explanation of everything you need to know about paying income tax, how to tax income and everything in between. Income tax is something that will follow you forever, so it’s best to get to know it now and forever hold peace with it.

USA Income Tax

Tax Special! Dividends Tax

Dividends tax also utilize capital gains taxes! Although dividends also carry their whole own addition of complications and confusions. We’ve writtena nother helpful and simple guide to learn everything you need to know about dividends taxes, how they work, when they occur, and of course also how to save money on your dividends taxes. No doubt you’re going to learn something very important in this article.

Dividends taxes are taxes on the dividends which you receive as a shareholder in a company. What are dividends? In a sense they are like the company sharing part of their income with you, as a reward and incentive of being a shareholder in their company.

USA Dividends Tax

Tax Special! Property Tax

As mentioned, taxes on property are nearly as complicated as on income or capital. Property taxes, where they are taxed, what they tax, and how to pay less property taxes, can all be found in our all-encompassing guide on property taxes.

Property tax is often confused as being a tax on real estate property. Yet this is a misconception. The largest proportion of property taxes come from real estate, because this is the most expensive property most people own. Yet property taxes can also be levied on airplanes, computers, furniture, etc. In the U.S., each person pays an average of $1.617 in property taxes a year. The state which pays the most property taxes is New Hampshire with $3.307.

USA Property Taxes

Partnership limited by shares (KGaA) – formation, financing, liability & Co

The partnership limited by shares – abbreviation: KGaA – is a relatively unknown form of corporate law and is formed as a hybrid of the conventional limited partnership – short: Kommandite or KG – plus the classic stock corporation – short: AG. Both the Kommandite and the AG belong to the so-called complete companies and are therefore primarily subject to the German Commercial Code (HGB). The limited partnership belongs beyond that however to the partnerships and has no own legal personality. The stock corporation, on the other hand, is probably the best-known corporation of all and is primarily committed to share trading.

The KGaA adopts the best features of both legal forms: it takes a stock corporation as its basic structure and supplements it with the structure of general partners and limited partners that is characteristic of the KG. Thus, the entrepreneurial management – similar to the AG – is divided into different bodies, whereas the liability risk is distributed among at least one personally liable partner and the remaining partners in the amount of their capital contribution. Although the partnership limited by shares is a limited partnership in name and suggests the legal status of a partnership, beware: it is in fact a corporation by virtue of its legal form, including its own legal personality!

Other typical corporations:

• Stock corporation (AG)
• European Company (Societas Europaea, abbreviated to SE)
• Entrepreneurial company / UG (limited liability)
• Limited liability company (GmbH)

Corporation KGaA – Stock Corporation Act §§ 278 – 290 & §§ 161 – 177a German Commercial Code (HGB)

In principle, the legal basis for partnerships limited by shares is the German Stock Corporation Act (Aktiengesetz, AktG), more precisely: paragraphs 278 to 290, where, among other things, the nature of the KGaA is defined. For the legal position of the individual partners, on the other hand, reference is made to the applicable provisions for conventional limited partnerships, which are found in the German Commercial Code (HGB) – sections 161 to 177a.

Excerpt from the law – § 278 AktG:

(1) A partnership limited by shares is a company with its own legal personality in which at least one partner has unlimited liability to the company’s creditors (general partner) and the others have an interest in the share capital divided into shares without being personally liable for the company’s obligations (limited shareholders).
(2) The legal relationship of the general partners among themselves and vis-à-vis the entirety of the limited liability shareholders as well as vis-à-vis third parties, namely the authority of the general partners to manage and represent the partnership, shall be determined in accordance with the provisions of the Commercial Code on limited partnerships.
(3) In all other respects, the provisions of the First Book concerning the stock corporation shall apply mutatis mutandis to the partnership limited by shares, unless otherwise provided for in the following provisions or in the absence of a management board.

Kommanditgesellschaft auf Aktien – International distribution of the legal form

The partnership limited by shares – abbreviated to KGaA – is where the legal form of a stock corporation and the typical features of a limited partnership meet. The resulting hybrid of a corporation and partnership features has so far been rather rare in Germany, although interest has been slowly but steadily increasing since the end of the 1990s. The partnership limited by shares also appears internationally, for example as a “commercial partnership limited by shares” in English-speaking countries or as a “société en commandite par actions” in France.

International distribution of the KGaA:

• Anglophone region: Commercial partnership limited by shares
• Belgium: Commanditaire vennootschap op aandelen (CommVA)
• Denmark: Partnerselskab (P/S) or Kommanditaktieselskab
• Germany: partnership limited by shares (KGaA)
• France: Société en commandite par actions (SCA)
• Italy: Società in accomandita per azioni (S. a. p. A. / S. A. A.)
• Iceland: Samlagshlutafélag (slhf.)
• Netherlands: Commanditaire vennootschap (CV)
• Poland: SpóÅka Komandytowo-Akcyjna (S. K. A.)
• Portugal: Sociedade em Comandita por acções (SCA)
• Spain: Sociedad comanditaria por acciones

Legal form variant Kapitalgesellschaft & Co KGaA – General partner as legal entity

Sometimes different corporations also appear in combination with a partnership limited by shares (KGaA). For example, family businesses occasionally organise themselves as a Gesellschaft mit beschränkter Haftung & Compagnie Kommanditgesellschaft auf Aktien – in short: GmbH & Co KGaA. In this case, they form a stock corporation in the legal sense – however, the general partner as personally liable shareholder is not just any natural person, but specifically a limited liability company (GmbH). If the general partner is instead embodied by an AG, it is referred to as an AG & Co KGaA, and in the case of a Societas Europaea, as an SE & Co KGaA.

More about the individual hybrid forms:

• GmbH & Co KGaA – see limited liability company (GmbH)
• AG & Co KGaA – see stock corporation (AG)
• SE & Co KGaA – see Societas Europaea (SE)

CEWE Stiftung & Co. KGaA is a special case: In this company, the general partner is embodied by a foundation. In principle, the partnership limited by shares is possible in all conceivable combinations, as GUB Investment Trust KGaA points out as an example.

Continue reading here on the topic of setting up a family foundation:

• Establish a family foundation

Foundation, company name & organs of a KGaA

The formation process of a partnership limited by shares is based on the formation process of stock corporations. Accordingly, a KGaA is considered a legal entity and can only participate in legal transactions through its executive bodies. Unlike the conventional stock corporation, however, this legal form does not provide for a management board as the governing body, so that the governing bodies of a KGaA are limited to the general meeting – consisting of the total of the limited liability shareholders – and the supervisory board. The management authority and the power to represent the company externally are incumbent on the general partners as personally liable partners.

You can find out here how the process of founding an AG works in detail:

• Formation of a public limited company

A personally liable partner can be either a natural person or a legal entity, which limits his liability to the business assets of the corporation and cleverly avoids personal liability. The limited partners or limited shareholders can also be natural persons or legal entities and are in any case only liable to the extent of their respective share contribution.

To set up your KGaA, you also need the following in brief: a tax identification number (tax ID); the confirmation of registration from the Trade Licensing Office; the shareholders’ agreement aka articles of association together with notarial certification; 50,000 euros of share capital; and finally the entry in the Commercial Register under the company name you have chosen plus the legal form suffix “KGaA”.

Examples of KGaA companies:

• Merck KGaA
• MERKUR PRIVATBANK KGaA

Limited partner & general partner: A question of liability

What is a limited partner and general partner? This is a question many people ask themselves when they first hear about the special characteristics of a limited partnership. This is because, unlike all other partnerships, the partners in a limited partnership are clearly divided into general partners and limited partners. Therefore, a single individual or legal entity can never be a general partner and a general partner at the same time.

Usually, general partners are the personally liable partners of a limited partnership. In a partnership limited by shares, too, a distinction is made between general partner and limited partner, the latter being contextually referred to as limited shareholder. The general partner bears the full risk as a general partner: as with the conventional KG, he is also jointly and severally liable, directly and without limitation with business assets and private assets. The liability risk of the limited shareholders, on the other hand, is limited only to the amount of the mandatory sum that they paid in as a limited partner contribution in the form of shares when the KGaA was formed.

Financing & profit distribution

The financing of a KGaA is advantageous compared to the conventional limited partnership, as equity capital can be raised more easily. Overall, as with the AG, a share capital of 50,000 euros or more is required. With regard to the distribution of profits and loss sharing, there are no special regulations compared to the conventional KG: Either the legal principles come into play or corresponding specifications have been anchored in the articles of association. Profits are distributed in principle to 4 per cent of the capital share plus additional profit “in the appropriate relationship”. Losses are also shared appropriately.

Taxes for company & shareholder: separation principle & transparency principle

Like all other forms of corporate law, the partnership limited by shares is generally liable to pay taxes. It is considered an independent tax subject with regard to corporate income tax and trade tax; all natural persons in the partnership are usually subject to income tax.

Due to its hybrid form, however, special regulations apply to the KGaA under tax law: the taxation of the company itself is based on the separation principle, the taxation of the limited liability shareholders is also based on the separation principle and the taxation of the general partners is compulsorily based on the transparency principle. In the case of taxable turnover, the KGaA is always subject to turnover tax.

• Trade tax (GewSt)
• Value added tax (VAT)
• Income tax (ESt)
• Corporate income tax (KSt)

Taxation of the KGaA – separation principle

As a corporation and legal entity, the partnership limited by shares is generally subject to corporate income tax. Insofar as the KGaA exercises its management and/or its registered office in Germany, it is deemed to be subject to unlimited corporate income tax and must pay tax on its entire global income accordingly. In the case of foreign management and/or foreign registered office with domestic income – for example from a domestic permanent establishment – the KGaA is deemed to have limited tax liability.

The profit of a KGaA is determined by means of a comparison of business assets. For the taxable income, on the other hand, a special provision applies with regard to deductible expenses, which is anchored in the German Corporate Income Tax Act (Körperschaftsteuergesetz, KStG) – the corporate income tax of the KGaA therefore only applies where income is attributable to the share capital, i.e.: the profit shares of the limited liability shareholders. The profit shares of the general partners as well as their management remuneration are deducted in advance and can be deducted as operating expenses. They do not come into play in the calculation of the KGaA’s income, but must be taxed by the general partners themselves.

Excerpt from the law – Section 9 (1) no. 1 KStG:

in the case of partnerships limited by shares and comparable corporations, that part of the profit which is distributed to personally liable partners on their contributions not made to the share capital or as remuneration (bonus) for management;

The KGaA must pay trade tax as an entrepreneur, regardless of its hybrid structure. Thus, the determined profit from business operations – increased and decreased by the amounts specified in the Trade Tax Act (GewSt) – is understood as the trade income of the KGaA. The amounts previously calculated for corporate income tax purposes for profit shares and management remuneration of the general partners are now added back to the calculated profit from business operations, thereby ensuring that no amounts escape taxation through trade tax.

Taxation of the limited liability shareholders of the KGaA – separation principle

As natural persons, limited shareholders do not have to pay corporate income tax. Therefore, their profit shares and any management remuneration are settled via the partnership limited by shares itself. Like their counterparts in the conventional limited partnership, they are subject to income tax in the event of a dividend distribution. If they hold limited partnership shares as private assets, they generate income from capital assets in accordance with the German Income Tax Act (EStG).

Taxation of the general partners of the KGaA – separation principle

General partners are taxed like co-entrepreneurs for the purposes of tax law. In this context, they are not to be regarded as co-entrepreneurs, but merely treated as co-entrepreneurs – a small but significant difference… especially in terms of “taxes”! As natural persons, general partners are subject to income tax as normal and must pay tax on their income from business operations.

In contrast to the limited liability shareholders, general partners are required to pay corporate income tax: Their profit shares and any management remuneration are deducted from the KGaA’s income to be determined and charged directly to the general partners. The corresponding amounts must be taxed as part of the income tax return.

Partnership limited by shares (KGaA) – For whom is it worthwhile?

The possibility of easy capital procurement is certainly one of the reasons for founders of new businesses to opt for the formation of a KGaA. In addition, the partnership limited by shares has a high resistance to takeovers, which is why the individual partners can contribute personally and maintain their entrepreneurial commitment despite high capital contributions. The sometimes high liability risk of the general partner can be absorbed by the clever positioning of a GmbH or AG as a personally liable partner.

So who is the partnership limited by shares suitable for? This legal form is worthwhile for start-ups that cannot avoid external financing, but do not want to make any concessions with regard to their decision-making authority as well as the management of their company. The special legal form of the KGaA provides family businesses with a company in which control does not have to be transferred to outside hands as soon as share capital is issued as shares.

Alternatives to the KGaA: Legal forms in Germany

Legal forms – What types of company are there? If you want to start your first company, then choosing the ideal legal form is one of the first steps in the process of setting up a company. Whether it’s a special real estate company or a start-up, I’ve summarized all the types of companies in Germany for you here.

• Legal forms: List

Company types in detail:

• Sole proprietorship
• Registered businessman / registered businesswoman (e. K.)
• Civil law partnership (GbR)
• General partnership (OHG)
• Limited partnership (KG)
• Entrepreneurial company (UG)
• GmbH: Limited liability company
• Real estate GmbH / Asset management GmbH
• Stock corporation (AG)
• Real estate stock corporation (REIT-AG)
• Societas Europaea (SE)
• Foundation / Family Foundation