7 Real Estate Tax Tricks For Germany

Key Takeaways

Discover little-known real estate tax strategies in Germany to enhance investments and avoid financial pitfalls effectively.
Master real estate tax strategies for profitable investments with these 7 essential tricks to navigate the complexities of taxation.
Selecting the Right Property for You: Choose properties wisely based on tax implications and personal financial circumstances.
Maximize tax deductions by ensuring renovation costs remain under 15% of the property’s value.
Separate furniture from property purchases to optimize tax benefits and depreciation rates efficiently.
Consider Denkmal properties for accelerated depreciation despite associated bureaucratic challenges for long-term tax benefits.
Weigh tax advantages and administrative burdens carefully when deciding between private and corporate property ownership.
Utilize the Ehegattenschaukel strategy for minimizing taxes and enhancing depreciation benefits during property transactions.
Optimize wealth transfer and minimize taxes by gifting properties while alive instead of waiting for inheritance.
Apply these real estate tax strategies in Germany to save significantly and maximize investment returns efficiently.

Introduction

Here are seven real estate tax tricks that you can use, which 99% of people in Germany don’t even know about. There are countless examples of people investing in real estate here in Germany who make millions. ImmoScout published a study last year showing that the number of properties sold on their platform for over 1 million euros doubled over the last five years.

On the other hand, there are also examples of people who ruin their financial existence through real estate. Take Rene Benko and his real estate empire, Signa, for instance. Once one of the richest Austrians, with a net worth of over 5 billion euros and ownership of half of Munich’s city center, he is now bankrupt. While Benko’s downfall wasn’t solely due to taxes, many first-time real estate buyers make significant tax mistakes that reduce their returns for no reason. That’s why we will explore the seven most important real estate tax tricks that everyone can use in this PerFinEx real estate article.

How to Utilize the 7 Real Estate Tax Tricks for Germany

To effectively utilize the seven real estate tax tricks in Germany, it is essential to focus on two critical stages of the real estate lifecycle: the buying phase and the selling phase. These stages offer the most significant opportunities for tax optimization. Once you have purchased a property, your options for tax benefits are quite limited, making it crucial to get things right from the beginning.

When buying a property, strategic decisions about the type of property, the structure of the purchase contract, and the extent of renovations can lead to substantial tax savings. For instance, selecting between existing buildings and new constructions, considering immediate tax deductions from renovations, and understanding depreciation benefits are key areas where smart choices can enhance your tax benefits.

Similarly, the selling phase presents opportunities to optimize taxes, such as utilizing the Ehegattenschaukel (spousal swing) strategy or planning for tax-free capital gains. By carefully timing the sale and exploring options like gifting properties while alive, you can maximize financial outcomes and reduce tax liabilities.

By focusing on these two stages—buying and selling—you can leverage the seven real estate tax tricks to significantly improve your tax situation and boost your overall investment returns.

1st Tax Trick: Selecting the Right Property for You

Optimizing your real estate buying process begins with selecting the right property. You typically have two main options: purchasing an existing building or buying new construction. Existing buildings are generally cheaper but require renovations to compete with new constructions. If these renovations are done in the right proportion, their costs are immediately tax deductible. For example, if you buy an existing building for 90,000 euros and invest 10,000 euros in renovations, these costs can be deducted immediately, providing up to 4,200 euros in tax benefits if your personal income tax rate is 42%. Conversely, purchasing new construction for 100,000 euros results in zero tax benefits because there are no renovation costs.

Depreciation also plays a crucial role. An existing building depreciates over 50 years at 2% annually, giving you 1,800 euros in tax benefits each year for the same property price. A new construction, however, depreciates at 3% per year, offering 3,000 euros in annual tax benefits. Therefore, your personal income tax rate is pivotal in deciding which property to buy. If your income exceeds 67,000 euros as a single person or 134,000 euros as a married couple, placing you in the 42% tax bracket, buying an existing building for immediate tax benefits from renovations is highly advantageous. Conversely, if your income falls below these thresholds and you pay for example only 25% in taxes, opting for a new construction to stretch out tax benefits is more beneficial.

2nd Tax Trick: Keep Renovations Below 15%

When planning renovation costs, it’s essential to keep them within the 15% barrier of the property value, not the entire purchase price. This strategy is crucial for maximizing tax benefits. First, check your purchasing contract to confirm if the property was separated from the ground value. If it wasn’t, you might miss out on substantial tax benefits, potentially costing you thousands of euros. However, if the property is separated from the ground, you are positioned well to optimize your tax advantages.

Properly separating renovation costs ensures you can take advantage of immediate tax deductions. Renovation costs that exceed 15% of the property value are not immediately deductible, significantly reducing potential tax benefits. For example, if you buy a property for 100,000 euros and the land is valued at 20,000 euros, you should keep renovation costs below 12,000 euros (15% of 80,000 euros). Staying within this threshold allows for immediate deductions, thus optimizing your tax benefits.

Adhering to this 15% rule enables you to improve your property’s value while leveraging tax advantages. This careful planning and strategic spending on renovations can help maximize your investment returns and ensure that you are utilizing all available tax benefits.

3rd Tax Trick: More Furniture, Less Property & Plot

An important real estate tax trick involves separating the furniture from the property and the ground in the purchasing contract. If you buy a furnished property, it’s a straightforward process. However, even if the property is mostly empty, buying any included furniture separately can decrease the property price accordingly. This approach offers two tax benefits: lower ground purchasing taxes and higher depreciation rates because furniture depreciates faster than properties. For instance, furniture depreciates over 10 years, while the property itself depreciates over 50 years.

It’s important to use common sense when applying this strategy. Claiming an excessively high value for minimal furniture can raise red flags and potentially be flagged as tax fraud. For example, valuing a few pieces of basic furniture at an exorbitant amount to reduce the property price could lead to issues with tax authorities. To avoid this, ensure that the valuation of the furniture is reasonable and justifiable.

Consulting a professional tax advisor can help ensure compliance with tax regulations while maximizing your benefits. A tax advisor can provide guidance on how to appropriately separate the value of furniture from the property, ensuring that you remain within legal limits and optimize your tax savings. This strategic approach can significantly enhance your investment’s profitability while adhering to tax laws.

4th Tax Trick: "Denkmal" with Higher Depreciation

Buying a monument property, or Denkmal, can offer significant tax benefits due to accelerated depreciation, but it comes with challenges. Denkmal properties can be depreciated over 12 years, compared to 50 years for regular properties, providing substantial tax advantages. This means that you can write off a larger portion of the property’s value each year, leading to considerable tax savings. However, the process of renovating these properties is stringent, as all modifications must comply with Denkmal laws and receive approval from relevant authorities. This can be both restrictive and time-consuming, adding layers of bureaucracy to your investment.

While the tax benefits of owning a Denkmal property are indeed appealing, the additional bureaucratic hurdles and limitations often make other types of properties more practical for most investors. The necessity to conform to historical preservation standards can limit the scope and style of renovations, potentially leading to higher costs and extended timelines. For many investors, the balance of immediate tax benefits versus long-term practicalities leans in favor of less restrictive property types. Before committing to a Denkmal investment, it’s crucial to weigh these factors carefully and consult with professionals who specialize in historic properties to fully understand the implications.

5th Tax Trick: Buying a Property Privatly or as a company

Buying property through a company, such as a GmbH, can offer notable tax benefits, including a lower tax rate on rental income, which is typically 15%. However, establishing and maintaining a real estate company involves significant costs and administrative burdens. These include incorporation fees, annual maintenance costs, and more complex tax filing requirements. Additionally, the ongoing administrative work and compliance with corporate regulations can be time-consuming and require professional assistance.

On the other hand, private property ownership usually incurs higher personal income taxes on rental income, sometimes up to 42%, depending on your tax bracket. However, the simplicity of private ownership, with fewer administrative responsibilities and lower ongoing costs, can make it an attractive option for many investors.

For most investors, the best strategy is to start with private property ownership. This allows for simpler management and fewer upfront costs. Once you have accumulated a substantial property portfolio and the potential tax savings outweigh the administrative costs, transitioning to a company structure can be beneficial. This balanced approach ensures that you effectively manage both tax benefits and administrative costs, optimizing your real estate investments for the long term.

6th Tax Trick: Ehegattenschaukel

Ehegattenschaukel, a German term translating to “spousal swing,” offers a strategic approach to maximizing tax benefits when selling properties within a family unit. The concept is simple yet effective: instead of jointly owning properties, each spouse purchases real estate individually. This practice extends to other family members in a horizontal line, such as parents and children, but not vertically, excluding siblings, for example. By structuring ownership in this manner, families can significantly reduce closing costs, potentially saving up to 6.5% in expenses.

Consider a scenario where one spouse acquires a property independently, holds it for a decade, and then sells it to the other spouse. As the transaction involves family members, there are no ground purchasing taxes incurred, resulting in substantial savings. Additionally, the appreciation in property value over the years can lead to significant tax-free gains upon sale. For instance, a property initially purchased for €500,000 may double in value over a decade, allowing the couple to pocket up to €1 million tax-free after the inter-spousal sale.

Moreover, leveraging a seller loan between spouses presents further tax-saving opportunities. Spouse two, purchasing the property, can deduct loan interest from taxes at a rate of up to 42%, while the capital gains tax on the interest paid by spouse one is only 25%. This arrangement optimizes tax benefits for both parties involved, resulting in substantial savings and increased financial flexibility. Ehegattenschaukel exemplifies a strategic approach to property transactions, highlighting the intricate yet rewarding nature of tax planning within familial contexts.

7th Tax Trick: Optimize Inheritance

Transferring properties to children or other heirs while still alive can significantly reduce the tax burden compared to posthumous inheritance. The German tax code allows parents to gift up to 400,000 euros to each child every 10 years, tax-free. This method avoids the high inheritance taxes that would otherwise apply to property transfers after death. By gifting properties during your lifetime, you ensure that your heirs receive the maximum benefit.

Additionally, this strategy optimizes tax benefits from depreciation and avoids ground purchasing taxes. When a property is transferred as a gift, the recipient can continue to depreciate the property, which can lead to substantial tax savings over time. This also provides an opportunity to reassess and adjust the property’s value for depreciation purposes, potentially increasing the annual tax deductions.

Moreover, gifting properties while alive allows for better financial planning and security for your family. It ensures that your heirs receive the assets in a tax-efficient manner, preserving more of your wealth within the family. Consulting with a tax advisor can help navigate the specifics and ensure compliance with all legal requirements, making this a strategic approach to wealth transfer and tax optimization.

Conclusion

In conclusion, these seven real estate tax tricks for Germany offer invaluable insights into optimizing your investment strategies. By implementing these adjustments, you can save substantial amounts in taxes and enhance your overall returns. Whether it’s choosing between existing buildings and new constructions, managing renovation costs, or leveraging advanced techniques like the Ehegattenschaukel and gifting properties while alive, each strategy has the potential to make a significant impact on your financial success.

We hope that these tips provide you with valuable guidance in navigating the intricacies of real estate taxation in Germany. Thank you for exploring these strategies with us, and may they empower you to make informed decisions and achieve your investment goals. If you need help finding the right property for you, feel free to book a meeting with us.