Properties cannot hide which makes it easier to tax them
Real estate is a particularly exciting topic from a tax point of view:
Since high values are regularly involved, a kind of special jurisdiction has developed in Germany in some cases (e.g. three-property limit, business splitting). And because real estate cannot leave the country, there are “special taxes” that only affect real estate (land transfer tax, property tax, second home tax).
At the same time, (almost) only real estate offers private individuals the chance to realise larger increases in value tax-free after a certain period of time. And with clever structuring, real estate and a limited liability company can make it possible to pay tax on current income at only 15.8%.
There is no “real estate tax law” that comprehensively regulates all areas. Rather, the tax regulations on real estate tax law are scattered in many different tax laws.
We will be at your side in every phase of your real-estate investment. Our advice covers these areas in particular:
- • Determining an investment structure that is best for you
• Holding real estate via partnerships (GmbH & Co. KG, GbR, etc.) or corporations (Immobilien-GmbH)
• Tax planning for real estate
• Acquiring real estate
• Disposal of real estate
• Separation of companies with real-estate holdings (division of real property)
• Reorganisations and disposals of companies with real-estate holdings
• Defence consultation in the event of tax risks (commercial property business, extended reduction of local business tax [Gewerbesteuer], unintentional contribution of real estate to a business asset, violation of the three-property limit, business split, etc.).
• Succession for real estate
• International real-estate investments
We will provide you with tax advice while guiding you through every step of the ongoing implementation of your project: drafting of contracts, articles of association, and shareholder agreements – as well as coordinating with notaries and authorities.
Our clients in property tax law
Our clients for real-estate consulting include:
• Partnerships and corporations with real-estate holdings
• Investors in the real-estate sector
• Private individuals with real-estate holdings
Clients appreciate our law firm’s expertise in real-estate tax law on account of our central location in Munich, our real-world experience, and easy-to-understand explanations. Our lawyers and tax advisors speak a clear language with clients instead of legalese and advise them on real-estate investments in all of Germany, including Munich.
What is property tax law?
Property tax law deals with various issues relating to the taxation of real estate in every phase of investment, including the acquisition, ongoing taxation and disposal of properties.
There is no single piece of real-estate tax legislation in Germany that comprehensively regulates everything. The tax regulations pertaining to real-estate tax law are scattered across many different tax laws. Since considerable sums of money are involved, a kind of special jurisdiction has developed in some cases.
What is the difference between real estate held “as private assets” or “as business assets”?
Depending on whether you hold your real estate as private assets or as business assets, tax law provides for different taxation of real estate. You must always be aware of this crucial difference if you are considering a real-estate investment.
Private assets: If you, as a natural person, acquire a property and then either use it for your own residential purposes or rent it out, you are basically acting in an asset-management capacity for tax purposes. This means that you hold the house or flat as your private property for tax purposes. The same also applies if a property is held by an asset-management partnership.
One appealing aspect here is that you can sell privately held real estate tax-free after ten years (more on this below). That is why classification of property is so important.
But if you buy and sell too many properties in too short a period of time (“three-property limit”), then your properties can inadvertently be classified as business assets.
Business assets: Are you a freelancer or a commercial entrepreneur? And you use your own building or part of a building for your business? In such cases, the property is classified as one of your business assets. The same also applies if a property is held by a commercial partnership or corporation. Especially in the case of an Immobilien-GmbH, all assets are by definition business assets of the company.
What factors should be taken into consideration when purchasing a property?
The purchase of a property triggers land transfer tax. In Germany, the amount of the land transfer tax is set at state level. Depending on the German state in which the property is located, the land transfer tax is between 3.5% and 6.5%.
When purchasing a property, the buyer should, among other things, ensure that the purchase agreement divides the purchase price between the land and the building. The reason for that is that only the building can be depreciated later. Although such a contractual purchase price allocation is currently not accepted without objection by many tax offices, it is an essential aspect in determining the amount of subsequent depreciation pursuant to case law of Germany’s Federal Fiscal Court. We can formulate a purchase-price allocation clause in the purchase agreement that is as unassailable as possible.
How is the renting out of real estate taxed?
If you rent out or lease a house, a flat, commercial property or even just land, you generate rental or leasing income from it. Here too, real-estate tax law distinguishes between private and business assets.
If the property is privately owned, the taxation of rental income is regulated in Sec. 21 EStG (German Income-Tax Act). Your profit from renting is taxable (income minus business expenses). In addition to other expenses, business expenses primarily include depreciation of the building (Sec. 7 EStG). Of particular note for lessors are three special, more favourable depreciation provisions: Sec. 7b EStG (special depreciation allowance for construction of new rented flats), Sec. 7h EStG (increased depreciation in redevelopment areas and urban growth areas), and Sec. 7i EStG Denkmal-AfA (deprecation for the use of listed buildings).
You must declare current rental income and expenses in your private income tax return. The progressive tax rate then basically depends on the amount of your total income.
If a property is held as a business asset, the rental and leasing income is treated and taxed as other business income.
As a result, local business tax (Gewerbesteuer) is due on the profit from renting, in addition to income tax or corporation tax. A special option here is generating rental income free of local business tax. This is referred to as an “extended reduction of local business tax”, regulated in Sec. 9 No. 2 GewStG. If you hold the property in a limited liability company, such an Immobilien-GmbH (real estate company) can make your real estate investments particularly worthwhile, as current profit is only taxed at 15.8%.
What taxes arise on the disposal of a property?
The sale of a property classified as a private asset can be tax-exempt or taxable. The sale of a house or flat that you previously used as your own residence is in most cases tax-free for you. If you rented out the property (or it was empty), then the sale is tax-free if you have owned the property for more than ten years. Otherwise, the profit is taxable at your personal tax rate (Sec. 23 EStG).
It can be especially favourable if you were able to claim increased depreciation, e.g. listed building depreciation, during the time you rented out the property – and then sell it tax-free after ten years.
If a property is held as a business asset for tax purposes, the disposal is always taxable – regardless of how long you have owned the house or flat, and irrespective of whether you have lived in it yourself. And if you hold the property in a GmbH (limited liability company), it may make more tax sense to sell the GmbH rather than just the property itself.
Why should you seek advice on real estate tax law?
As you can see, the taxation of real estate is associated with many special considerations. Due to substantial sums of money, the tax risk is particularly high. Especially if you own several properties, rent them out, or partly use them yourself, you should make sure that your investment structure is well thought out from a tax point of view.
Countless court cases address the details of property tax law every year, often because taxpayers unfortunately overlook “tax-risky” transactions. Please speak early on with our lawyers and tax advisors about the taxation of your real estate – either at our office in Munich, or in a phone or video conference. You can thus avoid unnecessary court proceedings and instead benefit for a long time from a well-conceived tax structure.
If you are in dispute with your tax office over a tax audit, an appeal against your tax assessment, or a lawsuit in tax court, we will aid you with our specialist expertise and experience in disputes with tax authorities.
All lawyers and tax advisors in our Munich office regularly complete advanced training on various topics relating to the taxation of real estate to ensure we are always up to date on the latest legislation and case law.