Real Estate in Germany – Everything you need to know

Key Takeaways

In real estate investing, a distinction is made between your personal and financial perspective
With an investment property, you have significantly more tax advantages than with a property for personal use
From a banks’ point of view, there is hardly any difference in financing real estate as a home or as an investment
Rental income in Germany is only taxed on an income of 10,347€ or more per year

Introduction: Reasons for a real estate purchase

Real estate has always been a very popular form of investment in Germany. This is due to security, good yield opportunities, or other reasons. A distinction is often made between real estate as an investment and a home for self-use. Hence, in this article, we will answer essential questions that need to be considered when buying real estate in Germany:

What are the differences in mortgage rates for buying a home & buying a rental property?
What is better: owning a home or rental property?
What are the taxes on real estate?
How is rental income taxed?

If you are thinking about investing in real estate, this article will help you get started with such an investment. After reading this article, it is important that you think about the mentioned questions and then move forward with your investment decision.

Differences In Mortgage Rates

The first important question is whether the mortgage rates for financing a home are different from financing a rental apartment, which we can answer with a “no”, based on our experience as financial advisors. In general, a bank will look at your financial situation and see if you are able to repay the mortgage you want to take out.

However, there is a difference between banks that offer you financing. Some banks will only finance a rental property if it is within 100 or 200 kilometers of your home. Other banks have the business model of only financing homeowners. Thus, if you ask for a mortgage for an investment property, you will not be offered one at all by some banks. Therefore, it is bank-internally regulated whether something is financed or not.

It should also be noted that some banks do not have specific requirements. This means concretely that there may be slight differences in mortgage rates. However, in almost all cases the interest rate will be the same. Fortunately, real differences do not arise from the form of investment, but from a tax perspective, but more on that later. If you need help choosing a mortgage, you can calculate the current best real estate loans here.

Do you need help finding the best real estate loan in Germany? Let’s find the best possible interest rate together for you.

Is Owning A Home Better Than Owning A Rental Property?

After clarifying the question of whether there are differences in mortgage rates, there is still the question of whether it is better to own a home or an investment property while renting yourself. To answer this question, it is necessary to look at the situation from two different angles.

The personal point of view: If you have ever lived or currently are living in a rental property, you know that you are lacking a certain degree of freedom. Maybe you’re not allowed to play an instrument you’d like to play, own a pet even though you’d like to have one, or do whatever you’d like to do with the space, etc. All of this is meaningless to homeowners. You can do whatever you want with your own four walls because it is your home and not someone else’s (more on this here).
The financial point of view: Owning your own home lets you still participate in the rising real estate market which grew by an average of 14.2% in 2021 (inflation-adjusted). However, you simply do not have the tax advantages that you will have with a property you rent out (more on this in our taxes on real estate). In addition, living on rent saves you any repair and renovation costs, which you will also have with a real estate investment, but again with tax advantages. You can then invest these financial savings profitably elsewhere.

As we can see the differentiation between the personal and financial point of view is not an easy one. That’s why we have once again described the debate between renting or buying an apartment in Germany in more detail in an additional article.

Taxes on Real Estate

If you take a look at the tax advantages and disadvantages, the German government does not really mind how or where exactly you live, or rather whether you live for rent or in a purchased property. This can be proven when considering the tax differences between a residential property for self-use or as a rental. Primarily, from Finanzamt’s point of view, it is a question of whether you want to make a profit on the property or not. Let’s have a deeper look into both options:

Property as a rental: In Germany the tax office assumes that you want to make a profit with a property if you are renting it out. If this is the case all costs incurred are tax deductible. These are, for example, the interest you pay to the bank as part of your mortgage, the closing costs when you buy the property, the ground purchasing tax, the notary, any modernization and renovation costs, and the real estate agent you may have to pay. Moreover, you can deduct 2% of the property’s value each year for depreciation as the property loses two percent of its value each year from a tax perspective. You could even tax deduct a professional property management company that takes care of managing the rental.
Property for self-use: When it comes to a personal home, you are not providing living space for someone else. Therefore, you get almost no tax benefits. As a result, none of the costs you have are tax-deductible. Only a small amount of renovation costs is tax-deductible for homeowners every now and then. Generally, this often leads to tremendous sums of money that you have to pay for all on your own.

Having this said, you should take into account these tax differences when deciding whether owning a home is better than owning a rental property. Generally, the tax advantages you receive with the help of an investment property allow you to make high profits. This will not only benefit you now but also in the future such as for your retirement to generate passive income every month. The mentioned tax benefits are exactly the reason why many real estate investors become very wealthy.

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How Is Rental Income Taxed?

Of course, an investment property offers more than just tax advantages. When renting out your investment property, you will generate monthly passive income. This can and will also inevitably lead to taxes at some point. But how exactly is the taxation of rental income calculated?

In Germany, the taxation of rental income is treated in the same way as the taxation of income. This means that you have to pay tax on rental income up to 45%, but you can also receive up to 10,347€ tax-free per year.
The earned income and the rental income are added together. So if you already earn more than 10,347€ in your employment, your rental income will be taxed as well.

The tax benefits come from the fact that your income from real estate is added on top of your income from work. While paying a mortgage, your income from real estate is likely to be negative (because of tax-deductible costs). Therefore, your overall tax rate will be lower than without owning a rental property.

Example: Your taxable income from work is 50,000€/year. Because of tax-deductible costs, your income from real estate is -4.000€/year. Your real taxable income will go down to 46,000€/year, therefore you don’t have to pay taxes on 4,000€ of income from work.

Conclusion: What's best for your situation?

Now that you have a brief overview of real estate in Germany, you need to weigh up the questions and aspects. Fortunately, there is not one right way here, but many different ones. In the end, both sides have legitimate arguments, and the myth that renting is a waste of money is simply not true.

Nevertheless, it is important to be clear what financial and personal impact your decisions will have on your situation. If you are already looking for a property, or have already found one, we are more than happy to support you. We can help you with financing as we have a strong partnership with 750+ banks. You are welcome to book a free meeting here so that we can have a look at the best possible interest rate for you.

Everything you need to know about real estate in Germany