In purchasing property, drawing income from your property investment and selling your property investment, there are several taxes to consider during the entire process.

In general, you can differentiate based on the transaction itself and recurring taxes that are paid on a yearly basis.

With transaction taxes – the taxes paid upon purchase are certain, whereas the capital gains tax is subject to the length of holding the property. Recurring taxes are subject to the level of taxable income and geographic location.

The income (less business expenses) is subject to individual or corporate income taxation. The deduction of expenses is limited for certain expenses, e.g. the interest expense from debt financing for business income is subject to the German earnings stripping rule (Zinsschranke).

An easy illustration to differentiate the two categories:

• Transaction Based Taxes: Land transfer tax (stamp duty) and Capital gains tax

• Recurring Taxes: Rental income and property tax

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Transaction Based Taxes in detail:

Land Transfer Tax:

This tax is paid by the buyer at the time of purchasing the property. It is taxed at a rate subject to geographical location and their respective federal tax rates

• Bavaria and Saxony at 3.5%
• Hamburg at 4.5%
• Baden Wurttemberg, Bremen, Mecklenburg-Pomerania, North Rhine Westphalia, Rhineland-Pfalz, Saxony-Anhalt and at 5%
• Berlin, Hesse 6%
• Schleswig-Holstein, Thuringia, Saarland, Brandenburg 6.5%
  

Capital Gains Tax:

This tax is paid upon selling your German property, however, is subject to the length of property ownership and whether the property has increased in price. Properties sold within 10 years of purchasing the property will be added a capital gains tax, which is a progressive rate meaning the higher your profit on the sale of your property means a higher tax rate. This tax rate is determined on the aggregated amount earned from your overall total income in that particular year, which includes the rental income in addition to your capital gains on the property investment. This tax rate varies between 14-45% which is in addition to the solidarity surcharge levied at a rate of 5.5%.

Recurring Based Taxes in detail:

Rental Income Tax:

Non-residents (not living in Germany) that are drawing a rental income from their property are subject to limited income tax liability.

Overview of the process:

• For all rental income generated within the calendar year, it is required for the property owner to submit a tax return prior to 31st May of the following calendar year. If a property owner uses a certified tax advisor, they can be granted special considerations for the tax return deadline extending to the end of the following calendar year (31st December).
• Prepare all the required documentation. The buyer must distinguish the existing forms they have received previously and the outstanding documents:

Documentation already received:

• Upon purchase of the property the buyer receives the Einheitswertbescheid (this is a letter giving you the ‘Aktenzeichen’ - a long string of numbers, e.g. 035/ 020/0007/ 037/103/4) and Grundsteuermessbescheid
• Purchase Agreement, Rent Contract, Mortgage Contract, duplicated copies of documents

Outstanding Documentation:

• Mantelbogen for persons with limited income tax liability (ESt 1C)
• This is a standard form that buyers are required to complete including your name, address and bank account details.
• ‍Anlage V Form which states the buyer’s profit & loss – this requires proof of rental income, expenses and depreciation.
• Submit the forms electronically if you use the software elster (German only); otherwise print all the forms (as shown above).
  

The property owner can offset depreciation (calculation to be followed) Interest payments, property tax, property management fees, legal fees, cost for certificated land charges (Grundschuld) first time, airfares, and other costs related to your property. (This is only valid for buy-to-let)

Property Tax:

Every German property owner, regardless of residence, is subject to paying property tax, which is paid on a quarterly basis. The property tax is calculated as a proportion of land allocated to the apartment, and with this in mind, each apartment is given an estimated value (Einheitswert) by the local tax authority. The Einheitswert is then multiplied against a standard value (3.5/1,000 – for apartments) giving you an important value, referred to as the Grundsteuermessbetrag. Then finally, the property tax is determined in respective geographical locations by multiplying a standardised factor by the Grundsteuermessbetrag.