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 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
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:
Documentation already received:
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)
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.