Buying Real Estate Rental Property – Best Investment Strategies

More and more people are choosing to buy rental property as a lucrative way of receiving passive income, with many opportunities for further investments, massive profits, and a life of luxury and opulence. There is much to consider and research before you make any investment in rental property, but you’re likely going to be quickly looking at cash flow and a realtor lifestyle you could only have dreamed of.

Is Buying a House to Rent a Good Investment? Advantages Disadvantages of Rental Property

There is not one clear answer to whether buying rental property is a good investment. It depends on many factors such as location, the behavior of the market, the tenants, unexpected costs, etc. Therefore it is impossible to say whether it is a good investment for you until you inform yourself as best as you can, and make an educated decision.

Advantages of Rental Property Investments – Tax Deductions, Financial Security

Being a landlord often sounds like a dream job. Essentially you’re being paid because people are living somewhere. It is the most famous and infamous source of passive income. This is perhaps its biggest advantage. In terms of how much work you have to put in per dollar earned, it can be extremely lucrative. Another advantage is that the real estate market tends to be quite stable, which means that the majority of properties (bought in good areas) increase in value. That means, while you’re making a passive income, one day the mortgage will be paid, and despite having made money off of your investment, you can sell it at a higher price than you bought it!

Rental Property Taxes – What Taxes do Landlords Pay?

For one, rental income is not subject to social security taxes. The social security tax rate is currently 12,4% split by employer and employee, meaning that when owning rental property you are paying 6,2% less taxes.

Disadvantages of Rental Property Investment – Difficult Tenants

The biggest downside is dealing with difficult tenants. These can be those that are harmful for the atmosphere (e.g. by being loud), those that damage property (high repair costs), and those that do not pay their rent on time. Another downside is also that you are legally bound quite heavily, as renters are strongly protected by the law. That means that difficulties can arise, and cause a lot of stress. Of course it’s important to decide in what real estate to invest, because if you buy a house, these issues tend to be less serious.

• Damaging Tenants
• Tenants who do not Pay Rent

What does a Landlord Do? Tasks, Responsibilities when Owning Rental Property

In short, a landlord is in charge of general upkeep. That means repairs in the house such as plumbing or electricity which the landlord has to fix. Other things include maintaining the more general facilites. For example, if you own rental property you have to make sure common areas are cleaned, the doors, elevator, etc. all work, and more. Then comes the problem of rent. Some tenants can be quite a hassle when they don’t pay rent on time, in which case you have to contact them and collect the rent yourself.

• Repairs in home
• Maintenance of Property
• Collecting Rent

Financial Planning for Becoming a Landlord

That means paying off all debts, making sure you have enough saved up for a downpayment, and securing your finances for the long-term future. It is also probably a good idea to secure a separate business account.

• Save enough for a Downpayment
• Job Security

Six Steps to Purchasing Rental Property – Buy House, Apartment

The five steps to owning rental property begins with your finances. Next, research and strategy. Where do you want to invest, how is the market in that area, what type of real estate you want to invest in, the general turn of the economy and much more! Now your strategy with short-term vs long-term rentals, buying a house or apartment, etc. Step 4 is finding the property you want to purchase. Step 5 means buying the property (and getting a good deal!). And lastly, perhaps most difficult, find tenants!

1. Order your Finances
2. Research
3. Strategy and Investment Planning
4. Find the Property
5. Purchase Property
6. Find Tenants

Step 1: Order your Finances – Landlord Bank Account, Savings

The most important thing before buying a house or buying an apartment is to get your finances in order. That means having paid off all debts, or nearly all, having a good credit score (otherwise get ready for mortgage insurance). Then, you will want to open a separate account. This can of course be done by registering a real estate LLC in which case you would buy the property over the company. Otherwise you will have to open a new account.

Step 2: Research – Where to Buy, When to Buy Rental Property

This is an important step, as you will need to get a lay of the land of where you want to invest and how. There is no universal manual because, e.g. if you buy a house in New York, it’s different than if you buy an apartment and then even more different if you buy an apartment in L.A. It’s also critical to know about the more specific location, there are always up-and-coming neighborhoods in every city. The top USA real estate neighborhoods are spread out all over, and you could be living near one without knowing! We’ve tracked down the best locations for the biggest players in American real estate:

• Top Neighborhoods: New York
• Top Neighborhoods: Los Angeles
• Top Neighborhoods: San Francisco
• Top Neighborhoods: Miami
• Top Neighborhoods: Las Vegas

Step 3: Strategy, Investment Planning – ROI, Value

The typical question for real estate and rental property investment is the ROI. ROI means return on investment, which is typically expressed in a percentage. It just tells you how much money you make in proportion to how much money you spend. You should know that, unlike stocks, or REITs, rental property will not be valuable or a good investment because it is constantly rising in value. Rather it is an additional income on the side, apart from your normal investments.

• ROI = Return on Investment
• Real estate is about cash flow

Step 4: Find the Property – House Hunting, Realtors

Next step is to find property, this can turn out to be quite difficult or quite easy depending on the region. Typically this is also the point where you will decide whether you choose a fixer-upper or a ready house. For experienced investors this is a normal thought, but if you are just starting out, a fixer-upper can be extremely risky and bankrupt you. Unless of course you want to get into flipping houses.

• Fix-Up or ready house?

Step 5: Purchase Property – Mortgage, Cash, Downpayment

Of course with a cash purchase you can circumvent a lot of the additional real estate purchase costs, but not all (think mortgage tax and transfer tax, and moving expenses). Still, as soon as you purchase with a mortgage you will be paying more in the form of mortgage interest. There are different opinions on the specifics, but it is always important that even if you are absolutely in love with a house, to let cooler heads prevail. There are many reasons to buy a house for rental property, but these are all related to finances and strategy.

• Real Estate Closing Costs
• Logic should decide whether you buy

To learn more about what happens when you get to the point of actually buying a house, you can take a look at our article on all the taxes you will pay when you buy a property or real estate.

Real Estate Purchase: All Taxes

Step 6: Find Tenants – Advertising, Location

This is the point that it can get very very frustrating, or very comfortable. If you’re living in a place like L.A., this can be quite easy with very high demand making a good tenant easy to find. In other places you may have to wait for the right one. Important though, if you get the feeling that the fit isn’t right, don’t sign a contract! It is near impossible to force a tenant out legally, and one more month without the extra income won’t make the difference.

• Don’t rush the search
• Easier in bigger cities, with higher demand

Top 5 Tips for Buying Rental Property! LLC, Saving Taxes

There are many things to be aware of, and things to take into account for buying rental property for real estate investment. It’s important that you research a lot so as to make a smart decision. Still, there are a few secret tips that are very important to ensure quick profit from rental property!

1. Do the Math!
2. Landlord Insurance
3. Found a Company
4. Buy or Finance?
5. Go out of State

Do the Math! Research, Calculation of Costs for Rentals

This is critical. Of course, before investing in rental property the most important thing is extensive and intensive research. This does not only consist of informing yourself about e.g. mortgage or mortgage interest, and a downpayment. The main question is: for each dollar that you invest in this real estate rental investment, how much will you get back. Factor in the time, and then compare to your finances. It is possible that your investment strategy only offers returns after two years. Can you hold out that long?

For each dollar you invest, how much will you gain? When is your investment profitable?

Get Landlord Insurance! Recover Lost Rental Income, Liability Protection

There are going to be accidents, unwanted injuries and more on your property. You need to protect yourself from this. One possibility is with a limited liability company or the similar s corporation (see below), but this is not going to protect you legally, rather than just make sure that a legal action does not bankrupt you. So you have to get landlord insurance! A landlord insurance covers lost rental income (great for the rare difficult tenant), damage to the property, and of course, as mentioned liability protection against injuries or worse on your property. Remember, itemizing insurance costs is one of the top methods of real estate tax deductions!

• Protection against lost rental income
• Damage to property
• Liability for injuries on property

Found a Company – LLC, S Corp or C Corp

As mentioned above, it’s important to protect yourself from possible liabilities. Even with landlord insurance, you should likely put in the effort and cost to found a real estate entity which owns the buildings in your place. The main examples are the LLC, S corporation, C corporation, and Limited Partnership. These all differ in the degree to which they protect you from liability, but also to the degree in which they prevent double taxation, a common problem with other real estate investment entities.

• LLC
• S Corp
• C Corp
• Limited Partnership

Buy or Finance? Mortgage or Cash for Rental Investments

You will hear many voices insuring you that the only smart choice for buying a rental property is to finance it, in other words to buy it using a mortgage. This is true in most cases, but if you have the money available, buying cash can be even better. No mortgage interest, no uncertainty, and you profit right away. Of course you’ll be a few thousand dollars lighter, bt this comes in with rental income over time. It’s also seemingly forgotten at times that a house purchased with a mortgage still requires a substantial downpayment, as well as significant additional costs buying real estate, which means even with a mortgage, where, e.g. a 20-year plan can hound you for years, you have some saving to do before starting to invest and reap profits.

• Buy with mortgage
• Consider alternative cash options

Go out-of-state! Rental Investments Far away – Is it Profitable?

Many first-time investors make the decision to buy close to home. They hear a great offer for a house nearby in an up-and-coming neighborhood and choose to buy because it’s just a few minutes drive away. It’s true of course that this has its advantages; if a renter has an issue or a repair, you can come by quickly and fix it, you can give personal house tours with no problems, etc. At the same time, it’s a calculation game. There are extremely profitable neighborhoods in many parts of the country. Buying a rental there can give you much larger profits in much shorter time. These profits would offer the possibility of a property manager, reduces your involvement and makes the now-larger income even more passive.

• Advantages to buying nearby
• Far away can be much more profitable

Gross Rental Income – Top Tip for Saving Taxes

Easily explained: rental income is taxed as your normal income would be taxed. That means you add it to your salary as you would a normal job. Rental income can include the following types of payments: Advance payments of rent, non-returned deposits, services provided in exchange of rental income. Now we know what the income consists of, but the question is how can you pay less of it?

What can be Deducted from Rental Income? Itemizing Tips

You can deduct more than you think from your rental income. That includes things like the mortgage interest of your property, the insurance costs and property taxes. Along with these it is also typically possible to deduct fees such as those for advertising your properties, and those for legal assistance and for the Homeowner’s Association.

• Depreciation
• Property Manager Payments
• Mortgage Interest
• Insurance Costs
• Property Taxes
• Advertisement Fees
• HOA / Condo Fees
• Legal and Professional Fees

There’s so many more tax deductions you can use when you own real estate, whether as residence or as a landlord!

Real Estate Tax Deductions

Best Gross Rental Income Deduction! Depreciation

The most important concept here is depreciation. Depreciation is the answer to every time you wondered why real estate moguls and landlords pay so few taxes. Large items bought for business purposes can be deducted from your taxes, but not all at once. That means e.g. a property worth $250.000 which is deducted from taxes over a 27,5 year period, leads to a reduction in your taxable income of

$250.000 / 27,5 y = $9.090

per year! Add that to all the other possible real estate tax deductions, and many owners pay no taxes on their rental income!

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.

What is an Immobilien GmbH?

Definition Immobilien GmbH – An Immobilien GmbH is a real estate company. Meaning a company that pursues the purpose of leasing, development, financing, realization or marketing. It is independent whether it concerns one or several real estates. It also includes the property management, for its own properties and those of third parties.

Are you looking to save more on your property investment in Germany? Our full guide:

• Real Estate Germany – Saving Money

Tax Advantage: GmbH instead of Private

To cut a long story short, where is the advantage? With a tax rate of 42 percent, private leasing means you can quickly pay 4-digit sums a year in taxes. Below a comparison, once using a private ownership and once with a GmbH ownership.

Example: Calculation of Private Rental Income

Here a very simplified calculation, for a fast comparison of the taxation of private renting incomes compared with commercial incomes of a GmbH. No tax allowances and no solidarity surcharge are taken into account here either.

Simplified example calculation (private):

• Monthly rental income: 1.000 Euro
• Rental income / year: 12.000 Euro
• Tax burden (income tax 42%): 5,040 Euro
• Profit after taxes: 6,960 Euro

Example: Calculation of Commercial Rental Income

Here a very simplified calculation, for a fast comparison of the taxation of private renting incomes compared with commercial incomes of a GmbH. No allowances are taken into account here either.

Simplified example calculation (GmbH):

• Monthly rental income: 1.000 Euro
• Rental income / year: 12.000 Euro
• Tax burden (corporate income tax 15%): 1.800 Euro
• Profit after taxes: 10,200 Euro

The difference is here, in our simplified invoice:

+ 3.240 Euro / year

Real Estate Company or Familienstiftung?

Starting a Stiftung, aka 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.

The big and central difference to the Immobilien GmbH, after the speculation period, you can sell your real estate tax-free. How this works, how you can set up a foundation and how your grandchildren will profit from it, you will learn in this article.

• Family Foundation

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!