Deduction of property costs and depreciation

Profits made from real estate are taxed as ordinary income. For determining what is actual taxable income, owners can deduct the interest on bank loans that financed the purchase and other expenses and property related costs (eg, management fees, insurance, legal fees, etc). Moreover, a depreciation of 2% of the building value per year (2.5% for properties built before 1925) can be deducted from the profit. As a result of the various deductions, the ongoing taxable income from an apartment is usually quite low.

Income tax for individuals owning property

For individuals, the taxable income is subject to a progressive income tax rate from 14-42%. Taking into account the depreciation (see above), the tax rate on the rental income is effectively lower.

The profits from the sale of properties held as private assets (held by a private person which has sold less than 3 properties in the last 5 years) are currently exempt from tax if the property was owned for over 10 years. Other special exemptions can apply if the apartment was used by the owners, themselves. If none of these tax exemptions apply, the profit from the sale is taxable like ongoing income. This tax exemption is only applicable for privately owned and sold properties, not for those sold by commercial companies such as a GmbH.

Income tax and capital gains tax for corporations

For corporations, the taxation follows a different pattern than it does with individuals. Generally, the taxation takes place on two levels:

1. The company pays 15.825% income tax (Körperschaftssteuer); commercial tax can usually be avoided if the company is only holding real estate, depending on the setup of the company, the properties and the usage of the properties.

2. For a German corporation, the profits paid to an individual as a shareholder is taxed with capital gains tax (26.375%) paid by the company. Depending on the respective double taxation treaty and the individual income situation, a reduced tax rate may be applicable (eg, 5-10%). Also, foreign companies may offer better tax rates.

Stamp Duty / Real Estate Transfer Tax

The transfer of property in Germany is subject to a transfer tax (Grunderwerbsteuer). The percentage varies between the German states – ranging between 3.5% (Bavaria, Saxony) and 6.5% (Schleswig-Holstein). In Berlin, it is currently 6% of the purchase price as it is in Frankfurt (Hessen). There are exemptions, mostly for the transfer of property within the family.

Inheritance Tax / Gift Tax

Inheritances and gifting are subject to the same tax rates. The tax rates differ depending on the closeness of the family relationship between the heir and the deceased/donor and the amount transferred. For this purpose, the law distinguishes between 3 classes of relation:

Class 1 Spouse, children, grandchildren, parents and grandparents (ie, direct line relatives) Class 2 Siblings, nieces and nephews Class 3 Non-related

Real Estate Tax

German property is subject to a real estate tax (Grundsteuer), levied annually. The tax base is the ‘assessed value’ (Einheitswert). The tax depends on several factors, including location, size and use. It also depends on the German State (Bundesland) in which the property is located. The owner pays it directly to the tax authority but, under most rental contracts, it can be recovered from the tenant. Typically, for a 1-bedroom apartment in Berlin, the tax will be around €150-250 per year which is comparatively low, compared to other countries.

In cooperation with VPMK