Dividends Tax – Detailed Guide and Simple Explanation

This is the basic basic guide you could hope to find. We take you through dividends tax from the very beginning to the very end, covering everything you could hope to learn about this form of tax, from income tax or capital gains, tax deductions, and more. Although usually reserved for tax collectors and your accountant, it’s good to know exactly what this is, how much it is, and how to to reduce it. Even if you’re not having to pay dividends tax at the moment, it’s good to get read up on it in the meantime.

Dividends Explained – Investment Basics

So, dividends. That’s what’s being taxed, and to understand how this tax works, we first take a look at how dividends work. More specifically, what are dividends?

Dividend Definition: What is a Dividend

A dividend is by definition number that’s divided by another number. In the context of finances, a dividend is the pay-out of the company’s earnings to its shareholders. There are two basic ways for shareholders of a company to make money, either by selling their shares, or because the company grows and pays out dividends to its shareholders.

• A dividend is what a company pays out to its shareholders when it makes profit
• Like a reward for investing

What is a Dividend Example? How Dividends Work

Consider you decide to invest in a company, for example you invest 500 shares. This company does quite well and over the next quarter they earn heavily. They then decide to pay out dividends. Because they did so well, they decide to pay out $0,50 per share. You own 500 shares, and that means

500 x $0,50 = $250

You receive $250. You do not have to sell your shares, and nothing changes about your shareholding in the company, it is merely a thank you, or a form of reward for holding shares and the company making earnings.

What are the Types of Dividends?

There are 5 basic types of dividends. They are: cash dividends, stock dividends, property dividends, scrip dividendss, and liquidating dividends. In the example above, we are dealing with a cash dividend. These are the most popular and frequent types of dividends. Next, stock dividends. These are where a company rewards a shareholder not with cash, but rather with more stocks. That means that the shareholder did realize an increase in capital, but not in the form of money, but rather in the form of owning more of the company. A property dividend is when you receive an object or any form of property as a dividend (e.g. a new sports car). A scrip dividend can be imagined as an I O U, and is typically done when companies do not have enough liquid assets. A liquidating dividend is when the company is dissolved and shareholders receive their investment.

• Cash Dividend
• Stock Dividend
• Property Dividend
• Scrip Dividend
• Liquidating Dividend

What is a Qualified Dividend? Difference Ordinary, Qualified Dividends

Especially when considering dividends taxes it is important to consider whether a dividend is qualified or unqualified (called ordinary). An ordinary dividend is taxed much higher than a qualified dividend, because ordinary dividends are taxed as income, while qualified dividends are taxed at the capital gains tax rate. So what’s the structural difference between these two types of dividends? The company behind them is either qualified or not.

• Qualified dividends are taxed at a lower rate!

When can Dividends be Qualified? Types of Companies

Whether a company’s dividends can become qualified depends on the origin of the company (i.e. American or not), the type of stock (e.g. REITs are not qualified), and the holding period. That means that the dividends can only be taxed at the lower capital gains tax rate when these requirements are fulfilled.

• Companies must fulfill requirements to become qualified

What is a Dividend Tax? Rates, Qualification, More

Now we know that a dividend is really just a form of payment from a company in which you have invested. You receive payment because the company grows and you are a shareholder within the company. Now it also makes sense that this is being taxed. Since you are making money, it is in a sense a form of income. But it’s slightly more complicated than that

Dividends Tax Definition: What is Dividends Tax?

Dividends tax is the tax on income made in the form of dividends. This is quite self-explanatory. Dividends are always taxed and there is no way around it. Even if you immediately invest all your dividends back into the same company, you will have to pay taxes on the dividends paid out to you. Dividends taxes themselves don’t actually exist, as they are either income taxes or capital gains taxes. It just depends on whether you have qualified dividends (taxed as capital gains) or ordinary dividends (taxed as income).

• Can be taxed as income or as capital gains
• Depends on qualification of dividends

To our article on Capital Gains Taxes: Capital Gains Taxes USA

To our article on Income Taxes: Income Taxes USA

Dividends Tax Example Calculation – How Dividends Tax Works, Formula

As mentioned before, dividends taxes are either income tax or capital gains tax. Either way we will give an example here. Take an income of $8.000 in a year for a unqualified dividend. This falls under the first tax bracket (when filing as a single) in the income tax brackets. That means you will pay 4% tax on this.

$8.000 – ($8.000 x 0.04) = $7.680

That means in the end you receive $7.680, and $320 you give away as part of your dividends tax.

What is Dividends Tax Rate? Tax Brackets, Rates

Depending on the type of dividend you have, you will pay different dividend tax rates. In short, the government taxes dividends either as capital gains or as income. There are two types of dividends, qualified (taxed as capital gains) and unqualified (taxed as income, see below for more). Therefore the tax rate of dividends tax is either the tax rate for your income tax or capital gains tax.

• Dividends tax rate is the same as either capital gains or income tax rates!
• Depends on whether a dividend is qualified

For tax brackets for unqualified dividends check out our article on

Income Tax USA

How to Save Money on Dividends Tax – Deductions, Itemizing

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: Save Dividends Tax with Income

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

Tax Deductions of Wealthy Families: Gifts!

Using what is called the annual gift tax exclusion, it is possible for wealthy families to keep money within the family instead of going to the state. The parents give their (adult) children very highly appreciated shares of stocks which pay dividends. This way, the unrealized gain is passed on, without triggering the deferred taxes! This works because the children will most likely not be as high earners, and therefore the dividends will be tax free under the capital gains tax.

• Pass on appreciated dividends-paying stocks to children whose income is not too high

Use Capital Gains Tax Tricks!

Capital gains taxes are possibly the most lucrative for tax deductions and reducing your tax bill at the end of the year. There are many ways in which you can use dividends taxes on qualified dividends to reduce your tax bill, because they are capital gains taxes!

• Capital Gains Taxes USA

Transform into Real Estate!

Everyone knows real estate is a lucrative business, even more so thanks to the countless tax incentives. So maybe instead using dividends for income, it is better to transform them into real estate property using a real estate LLC. Read more about real estate tax tricks:

• Real Estate Tax Deductions

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.

Income Tax USA

Tax Special! Capital Gains Tax

Capital gains tax is one of the two sisters of dividends taxes. It is a vital tax to know if you want to invest, and plan on increasing value of capital. Capital gains taxes are among the most important for the welathy, and for good reason. Knowing how to use these to your advantage is critical for multiplying your wealth.

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. 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!

USA Capital Gains Taxes

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

House & Buy a flat: Real estate investment

Many real estate buyers bring a lot of time with them, some of them need to move quickly. Career changes, spontaneous inheritance, but also tax aspects, such as profits at the end of the year to avoid tax, play a role for some property buyers.

Factor: Time, local knowledge and laws for owners

But it is not only the time that holds risks for many a real estate investor, the lack of local knowledge also ensures that the property search takes considerably longer than planned and causes considerably more sources of error. Sometimes expensive mistakes, after all you are moving in a new legal system (USA or Europe, or Germany).

Risk factors:

• Lack of time
• Lack of local knowledge
• New laws and taxes

Real estate yield: city districts in comparison

Some evergreen districts, mainly in the city centres, always pay off for real estate investors in the end. On the other hand, the return on the property is “only” moderate. If you want a higher property return, you have to go to Upcoming districts.

Some buyers, however, will by no means deal with the yield of a property, but first of all with the basics, the mistakes that can be made when buying a property, as well as the procedure, from the search, through the broker of the to purchase contract and notary.

Real estate special: USA, Germany (emigrants)

Hundreds of thousands immigrate to both countries every year, hundreds of thousands leave the countries and look for a new home. Career changes, as described in the introduction, the new love, a spontaneous inheritance or a blatant change of scene. It is not always about investment. This is another reason why our little guides are intended to provide a quick and clear insight into the megacities of both countries.

Example New York City

Here is a little insight into the city that never sleeps. Which districts do you need to know? Which taxes are important for real estate buyers in the USA? Even in the state of New York?

• Investment brochures

Each individual investment brochure is available in two languages, English and German. Tip! Among the individual investment brochures you will find more detailed information, for example on the square metre prices for condominiums and houses in the respective cities. You can find out about buying a house or buying an apartment free of charge from us at. Here you can access the respective overview, invest in the USA and invest in Germany:

• Investment brochures

Multi-family houses and renting

You do not want to buy only for your own use but would like to rent out parts of your property? Then there are once again very special requirements, laws and regulations that you need to know.

• Buy a multi-family house
• Build or buy an apartment building ?

Condo? Apartment? House? – Type of Real Estate Decisions

So you’ve decided you want to buy real estate. Should you invest in a house or an apartment? What has better resale value? There’s thousands of questions, so below we summarize the most important facts you have to know about what type of real estate you should invest in. There are some important questions though, which we answer below.

Buying real estate? Don’t forget about the…

• 3 Taxes – Buying a House

Do I want to Live in my Real Estate Investment?

Or using the lingo: Investment or owner-occupied properties? If you’re investing in real estate, you will know whether it is for a profit via e.g. rental, flip, appreciation, etc. or whether you want to live in it yourself (i.e. as owner-occupied property). This distinction is important when deciding what type of real estate you want to invest in. For example, buying a house to flip means different taxes than when you use it as a primary residence. This is an important part of the discussion, and therefore will be mentioned often further on. The most important difference for investors is between single-family residentials (e.g. a house) or multi-family residentials (e.g. an apartment building). Note, financing with e.g. mortgages is less lucrative and more difficult to attain for investment properties.

Financing is more difficult for investment properties!

Real Estate Investment – Forming a Business Company, Types of Entities

If you’re going to invest in real estate, you will want to reduce real estate taxes, and reduce liability. This is important so that you do not become involved in a costly legal battle which can cost you your livelihood. Forming a company which rents our property means that the company is liable, and not you. There are many forms of real estate business entities, so check out the full list below:

• LLC
• Limited Partnership
• General Partnership
• S Corporation
• C Corporation
• Multiple Entities
• REIT

What Types of Real Estate are there?

There are 4 different types of real estate: residential, commercial, industrial, and land. We here focus only on residential real estate. This includes many types of buildings, which often have different names in different regions. Our list will go through the top 4 types:

1. House
2. Apartment
3. Condo
4. Townhouse

Of course, if you are deciding on a residence, you will know whether you want to live in an apartment in the city, or a house in the suburbs. Below, we focus on which type of real estate is most profitable.

Should I Rent out my Property?

This is one question which you may not be certain on. After buying real estate, you have two main options: Sell it on, or rent it out. Of course, you can leave it empty to avoid costs of repairs and reap the benefits of appreciation later, or any other number of things, but here we will focus on these two options as they are most popular. There are pros and cons to both sides, and the answer to the question depends on a few factors.

Financing

Buying a property to rent out has different tax implications, as well as different effects on your mortgage. Almost everywhere, investment properties are encouraged, and incentivized via tax deductions. That means lower taxes on the income you make from rental properties, than from selling/flipping. Looking at rental properties, you are entitled to deduct most of the expenses of your property your tax sheet. Repair services, the expenses of home office, insurance and mortgage insurance, are all deductible. The biggest advantage is likely depreciation though, where you can write off the consistently sinking value of a property from your taxes.

• Biggest advantage: Depreciation!

Involvement

The dream of real estate mogul is connected with passive income. That is, letting your investment make you profit, without the pressure of having to run a business or go to the office yourself. That’s called passive income, and it sounds quite comfortable (more comfortable, of course, than it actually is). That’s the type of income you have with rentals, where apart from repairs (which your property manager will take care of), you have little to no involvement yourself. Active income, the opposite of passive, is what most people do in their day job, working for every cent you receive. If you plan to sell your property, you are likely much more active in the process. If you plan on flipping your house, i.e. buy-renovate-resell, you can consider this a day job, as it requires much more consistent work.

Risks

If you are looking to rent out property, there is of course the risk of not finding tenants. On the other hand, there is a similar risk for flipping, when you fail to sell the house above acquisition price (i.e. the cost of buying and renovating the property). In any case, a real estate investment only carries risks if the decision to buy is made without looking at extensive information.

What Type of Real Estate Should I Invest in?

Now that we have all that cleared up, we go on to the different types of real estate and the advantages of each.

House

The so-called single-family residential. This is something everyone is familiar with, and needs no introduction. Typically when you buy a house, you pay a percentage of the full price up front (down payment), and then monthly pay off the rest of the price (the mortgage, more on all this in our article: Mortgage Explained Easily).

Advantages

Lower up-front cost means that at the point of purchase, you have to invest less money than you would for other types of real estate. There’s also the factor that you can quite freely decorate or renovate, without worrying about a building coop breathing down your neck. Another big advantage, you’re buying land at the same time as your house. Even without the house, this appreciates in value.

• Freedom & Privacy

Disadvantages

You’re the person in charge. The same way that carries advantages it also has disadvantages. You need to do repairs, servicing, etc. Of course, there’s also the price. Houses are of course much more expensive than apartments, even when finding a good mortgage. The location, with houses often being situated in suburbs, means distance to the big events or the inner city life. Of course this is also desirable for some, such as young families.

• Responsibility & Work

Apartment

Apartments are often the first step for first-time home buyers. An apartment is any form of residence which is situated within a larger apartment building. Although they are not always the most spacious, they are relatively cheap, and offer a good choice for those people looking to live in the city, as opposed to the suburbs. People often think that it is only possible to rent apartments, and although this is definitely the most common choice, it is also possible to buy and sell an apartment.

The advantages listed above are of course the most convincing. On top of this, you have people like the property manager, who come take care of issues such as plumbing. That means less responsibility for you, the resident. Additionally, the modern apartment building has amenities such as a pool or a fitness room. Lastly, it’s much less lonely, with the common spaces giving room for interactions with your neighbours. Looking at finances though, your apartment is less likely to appreciate in price, meaning that you won’t make profit when selling it.

Condo

A condo is for many the in-between option of apartment and house. It offers the size and relative privacy of a house, without the responsibility of owning a free-standing house. Attached to condos are often things like concierges, and security. Again, here it is also possible to rent, but also buy a condo.

Like apartments, this form of real estate is also less of a risk, as well as less of a commitment, than buying a house. People often neglect the fact that, just like in apartments, you will pay fees for repairs, or to the building managers. These ‘condo fees’ are somewhere between $100 and $700 a month. Another disadvantage is also the close proximity to neighbours.

• Condo Fees: $100-$700 /month

Townhouse

A townhouse is the often-forgotten fourth option. Here, just as with a house you own the property, i.e. the land as well as the building in which you live. This is advantageous because it allows you to build equity over time. So what’s the difference to a normal house? Townhouses are usually set up in a row, wall to wall with the neighbouring houses. That means less privacy, and common issues. Yet, for this reason, and because these are usually smaller than your average house, townhouses can be cheaper to finance. Additionally, they are great options for more space in more populous areas such as downtown city centers.

If you’re thinking about buying a condo, make sure to inquire in the other condos in the association/development. At least 90% should be owner-occupied. Even if you’re renting, ask around and find out how the rest of the owners are doing financially. An association means that if a singificant proportion of tenants are unable to pay, or are simply not paying, you will have to shoulder the load. So if they don’t pay you may suffer.

• >90% of Condos should be Owner-Occupied

Invest, Sooner or Later

No matter when you do decide to invest. Real estate is often the right choice, given that the necessary leg work is done beforehand. That means, getting informed, knowing about the options, and the dis- and advantages of all these options. Our guides on mortgage, property taxes, and costs, give you a strong foundation for what you need to consider.

Looking at real estate in Germany? Our encompassing guide tells you all:

• German Real Estate – Everything you Need to Know

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.

• What are the most Expensive Cities in Germany?

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.

• Ancillary Costs of Real Estate Purchase

Grunderwerbsteuer: Real Estate Transfer Tax

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

The Grunderwerbsteuer 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.

• Grunderwerbsteuer: German Real Estate Transfer Tax Explained

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:

• Appraising property

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

• Appraising Apartment
• Appraising House
• Appraising Apartment Buildings
• Appraising Land

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.

• Immobilien GmbH Explained

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.

• Familienstiftung: German Tax Optimization for Leasing

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:

• Buying Real Estate: All Taxes to Know

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.

• Tax Deductions USA

Taxes on the Sale of Real Estate

Coming soon!

Most Expensive in the Country?

If you want to buy an apartment in New York, or buy a house in New York, you should be certain of your neighborhoods property taxes. New York’s property taxes are some of the highest in the country. With the top 5 highest property tax rates in the USA, finding home in New York State. This, despite New York City’s five boroughs having an average property tax rate 0,86%. New York’s investment possibilities are endless, and can be found in its boroughs, but outside as well with the shores of Lake Ontario, or the capital of Albany. New York is also one of the few states in the country where you are required to pay Mortgage Tax.

• New York Property Tax: 0,86%
• California Property Tax: 0,77%
• Florida Property Tax: 0,94%

What are Property Taxes?

Property Taxes are ad-valorem taxes which you pay for owning property, meaning that it is based on the monetary value which is estimated to be attached to an item, piece of land, property, etc. A property appraiser provides the basis for calculation. If you’re planning to buy real estate in New York, you’re going to have to get acquainted.

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. When buying a house, these must be paid in advance, and then received back from the seller.

• Property Taxes are taxes on: Real Estate, Airplanes, Boats, etc.

How are Property Taxes Calculated?

Property taxes are ad-valorem taxes, meaning the amount you have to pay on these taxes is determined by the value of the property. This value is estimated by an appraiser, and takes into account location, age, etc. Property taxes are typically a rate which is multiplied by the estimated value of the property. E.g. a property in California will be subject to a property tax of about 0.77%. A property valued at a total of $3 mio. will require the owner to pay property tax to the sum of $23.100.

Tax Bill = Property Tax Rate x Value of Property

Property taxes are a complicated concept. To learn more about U.S. property taxes, when you have to pay them, and how much each state pays in property taxes,

• Property Tax in the U.S. – Guide

New York Property Tax Explained

In New York, property tax is quite high compared to other states. In New York State, property taxes change from year to year, depending on the needs of the state. Additionally, it is also complicated by the fact that tax rates are constructed in millage rates as opposed to tax rates. Buying an apartment in New York is therefore more complicated than you’d like, but let us try to explain.

Mill Rates are Tax Rates

Millage rates serve the same purpose and work quite similarly to conventional property tax rates. A millage rate, is first and foremost a number. This number indicates the amount of property tax a property owner is required to pay for their property. A mill rate of 1 indicates 1$ of tax for $1.000 worth of property, a mill rate of 24 indicates $24 of tax per $1.000 worth of property.

• Mill Rate of 1 indicates 1$ of tax for $1.000 worth of property

Residential Assessment Ratios – Determine your Home’s Worth

Sounds complicated, but if you’re looking into buying real estate in New York, you have to know what RAR’s are. RAR’s are a method by which the state accounts for fluctuations in the real estate market. You can challenge the assessment given to you via the RAR when you believe you property is worth 10% less than the assessment. By law, the equalization rates are used to divide taxes in tax zones that cross municipal boundaries. These tax jurisdictions can be school districts or the county.

• RAR is a ratio determining the assessment of your home

Too Much Property Taxes on your Home?

As always, there is an assessment on the value of your home. To calculate the property taxes you have to pay, you would usually calculate your property tax by multiplying this by the tax rate of your county. In New York state, you receive an approximate value which you multiply by the Residential Assessment Ratio. This gives you a value on your property, based on which you will pay your property tax.

Estimated Value = Assessment Value x RAR

Property Tax Exemptions In New York

In New York, a wide variety of tax exemptions exist. They exist with the intention of supporting those disadvantaged. Note, that these exemptions are tax breaks, meaning that they reduce the value of the property which you are paying taxes on.

STAR (School Tax Relief) is for owners of residential properties with an income <$250.000. This can save about $300/year. For owners of residentials older than 65, and with an income lower than $90.550 this can be improved to enhanced STAR, with approximate savings of $650/year. All need to be appliedd for before the deadline of March 15.

If you want to learn more about lowering your property taxes, we have a guide on the subject

• Tax Deductions for Real Estate

New York City Property Tax

Many people looking to buy a home in New York State are mostly interested in the massive metropolis making up much of its fame. The big apple is made up of 5 counties, although these counties are here counted as boroughs, and therefore do not have their own governmental agencies. New York City has an average property tax rate of 0.86% across the five counties which make up the city.

Property Tax Rate in NYC: 0.86%

Buying Property: Mansion Tax

When buying a property in New York city, you may be subject to the “mansion tax”, beginning with an extra rate of 1% when buying properties worth more than $1.000.000. This tax is intended to provide the state more funding from high earners or those with more capital. This tax, unlike property transfer tax, is paid by the buyer. For this reason it is also a staggered tax, with higher property prices incurring higher rates. These rates are from 1% up to 3.9% depending on the value of the property. Below the mansion tax rates, depending on the amount the property is bought for.

• 1.00% – $1.000.00 < $1.999.999
• 1.25% – $2,000,000 < $2,999,999
• 1.50% – $3,000,000 < $4,999,999
• 2.25% – $5,000,000 < $9,999,999
• 3.25% – $10,000,000 < $14,999,999
• 3.50% – $15,000,000 < $19,999,999
• 3.75% – $20,000,000 < $24,999,999
• 3.90% – $25,000,000 or more

Mansion tax is just one of the taxes you have to pay when buying real estate. Learn more in our article on Taxes You Pay when Buying a Property.

Building Classes – What Tax Class is your Building in?

In New York City there are different tax classes for different buildings. These set the assessment ratios, mentioned in the RAR’s above. That means that depending on which building class your property falls under, you pay a different tax rate. You are most likely to be owner of a class 1 property, as these are residential properties. Class 2 includes all properties not included in class 1, but still fall into the category of residentials. Class 3, is what is known as utility property, and class 4 commerical and industrial properties. This final class is where you would be taxed as the owner of an office space or factory. The tax rates for these classes are:

• Class 1 – 21.05%
• Class 2 – 12.27%
• Class 3 – 12.83%
• Class 4 – 10.69%

New York City Counties Property Tax Rates

The individual counties in New York city have varying property tax rates, but also make up the 5 lowest property tax rates in the whole state. This makes them an attractive place for investment, with low capital losses each year.

• Kings (Manhattan) – 0.65%
• Queens – 0.87%
• New York – 0.90%
• Richmond (Staten Island) – 0.91%
• Bronx – 0.97%

Ranked – Property Tax Rates by County

There are 62 counties in New York State. All have their own tax rates. These are also quite high, Californian property tax rates are minimal compared to these. Although, the popular counties around New York city are among the lowest, and lower than most in California. You will find the highest tax rates in Orleans (3.28%), Allegany (3.30%), and Montgomery (3.46%), with the lowest property tax rates in New York being in Kings (0.65%), Queens (0.87%), and New York (0.90%). Below is the list of New York state property tax rates, ranked from lowest to highest.

• Kings – 0.65%
• Queens – 0.87%
• New York – 0.90%
• Richmond – 0.91%
• Bronx – 0.97%
• Hamilton – 1.11%
• Saratoga – 1.62%
• Warren – 1.63%
• Jefferson – 1.64%
• Greene – 1.70%
• Essex – 1.76%
• Lewis – 1.83%
• Otsego – 1.83%
• Columbia – 1.93%
• Westchester – 1.95%
• Delaware – 1.99%
• Clinton – 2.06%
• Albany – 2.08%
• Franklin – 2.09%
• Nassau – 2.17%
• Yates – 2.17%
• Dutchess – 2.20%
• Washington – 2.25%
• Schoharie – 2.28%
• Schuyler – 2.31%
• Rockland – 2.35%
• Suffolk – 2.35%
• Ulster – 2.39%
• Ontario – 2.41%
• Tompkins – 2.45%
• Rensselaer – 2.47%
• Madison – 2.49%
• Cayuga – 2.50%
• St. Lawrence – 2.51%
• Fulton – 2.53%
• Herkimer – 2.55%
• Orange – 2.55%
• Chenango – 2.56%
• Oneida – 2.56%
• Putnam – 2.57%
• Chemung – 2.59%
• Sullivan – 2.59%
• Erie – 2.63%
• Tioga – 2.64%
• Broome – 2.77%
• Steuben – 2.78%
• Seneca – 2.80%
• Wyoming – 2.80%
• Livingston – 2.81%
• Onondaga – 2.81%
• Schenectady – 2.84%
• Genesee – 2.86%
• Chautauqua – 2.87%
• Oswego – 2.88%
• Wayne – 2.94%
• Niagara – 2.98%
• Cattaraugus – 3.11%
• Cortland – 3.17%
• Monroe – 3.19%
• Montgomery – 3.28%
• Allegany – 3.30%
• Orleans – 3.46%