Key Takeaways

From a banks’ point of view, there is hardly any difference in financing real estate as a home or as an investment
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
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. Unfortunately, the German Finanzamt does not make it easy for us to find out the differences. 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 loan 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 desired property . Other banks have the business model of only financing homeowners. Thus, if you ask for a loan for an investment property, you will not be offered one at all. 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 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 loan, 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 a rental while renting a property. 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 often seems financially very lucrative. This is because you don’t have to pay rent and can 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 are tax-advantaged. 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 the tax office’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:

Residential 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 two percent of the property’s value each year as the property loses two percent of its value each year from a taxman’s perspective. You could even tax deduct a professional property management company that takes care of managing the rental.
Residential property for self-use: When it comes to a personal home, the tax office usually does not assume that you would want to make any profit. They would rather assume self-serving purposes such as improving your own living situation. As a result, none of the costs that are eligible for a property’s rent are deductible. Only a small amount of renovation costs is tax deductible for homeowners now and then. Generally, this often leads in 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 very good profits. This will not only benefit you now but also in your future 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 even though they are losing money in the eyes of the Finanzamt.

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How Is Rental Income Taxed?

Of course, an investment property has more than just tax advantages. You also have to rent it out, for which you need a tenant. If you have found one, or a property management is taking over, your property will generate monthly income. This can and will also inevitably lead to taxes again. 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 work, your rental income will be taxed as well.
It is only possible to receive tax-free rental income if you do not have a job or do not receive earned income. Otherwise, starting from 10.347€, taxes of 14%, ascending, are due.

Thus, only a few people will benefit from the pleasure of tax-free rental income. Even the pension income will be taxed as normal earned income and thus, will be added towards the rental income. Let’s be honest here. 10.347 € per year will be very difficult for you to live. It should be also noted that this taxation applies only to each euro earned. So if you are still paying off your loan and the monthly installments are more than the rental income, or at least as much, your income will not be taxed. Due to this reason, it might not always be bad having a loan for several years.

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. Then, you can take care of everything else. 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 500+ 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