Property and taxes in Germany: general orientation

What you will learn

• How rental income is taxed and which expenses landlords can deduct
• How building depreciation (AfA) works and why land cannot be depreciated
• When a gain from selling a property is taxable and when it is tax-free under current rules
• How REIT shares and property funds are taxed

Explanation

This is general orientation for Germany, not tax advice. Rules change; check them and consult a Steuerberater (tax adviser). Purchase taxes were covered in lesson 2, general fund taxation in the ETF course.

Rental income

Income from letting a property is a separate income type, income from renting and leasing (Einkünfte aus Vermietung und Verpachtung, § 21 Income Tax Act, EStG). It is taxed at your personal income tax rate, not at the flat 25% capital income tax.

The taxable result is rent received minus income-related expenses (Werbungskosten), mainly:

• loan interest (not principal repayment);
• maintenance, management, insurance, property tax (Grundsteuer) and other costs not passed on to tenants;
• depreciation of the building (AfA, Absetzung für Abnutzung).

A letting loss can generally be offset against other income such as salary. If the rent is below 66% of the local comparable rent (for example when letting to relatives), deductions can be restricted.

Depreciation (AfA)

Only the building wears out; land is not depreciable. Purchase price and incidental costs (notary, land register, Grunderwerbsteuer, broker) are split into a land share and a building share. Current straight-line rates for residential rental buildings:

For new rental housing with construction start (or purchase contract) between 1 October 2023 and 30 September 2029, a declining-balance AfA of 5% of the remaining value per year is available as an alternative.

If renovation costs within three years of purchase exceed 15% of the building cost (excluding VAT), they are usually depreciated with the building (anschaffungsnahe Herstellungskosten) instead of being deducted immediately.

Selling a property

Under current law, a gain from selling privately held property is taxable at your personal rate as a private sale transaction (§ 23 EStG) if purchase and sale are no more than ten years apart. It is tax-free if the property was used only for your own housing, or in the year of sale and the two preceding years. Gains below €1,000 per year from such transactions are tax-free; at €1,000 or more the entire gain is taxable (an exemption limit, Freigrenze, not an allowance). The depreciation you claimed reduces your cost base and so increases the taxable gain. Changes to the ten-year rule have been proposed in parliament; check the status before any sale.

If you buy and sell several properties within a short time, the tax office may treat you as a commercial property dealer (gewerblicher Grundstückshandel). A guideline is the "three-object limit" (more than three sales within about five years of purchase); gains then become business income, subject to trade tax.

Listed and fund real estate

Privately held REIT and property shares produce capital income: 25% Abgeltungsteuer plus solidarity surcharge and possibly church tax. Foreign REITs may involve withholding tax. Open-ended real estate funds benefit from a partial exemption (Teilfreistellung) under the Investment Tax Act: 60% of income is tax-free for real estate funds, and 80% for funds that invest mainly in foreign property. Real estate ETFs may be classified differently; check the fund documents.

Worked example

Hypothetical example: You buy a rented flat for €300,000 plus €30,000 incidental costs. The land share is 25%. The building was completed in 1995 (2% AfA). Annual figures: rent €12,000, loan interest €7,200, maintenance €1,500, other non-recoverable costs €800. Hypothetical marginal tax rate: 42%; surcharges ignored.

1. Total cost = €330,000. Building share = 75% × €330,000 = €247,500; land = €82,500.
2. AfA = 2% × €247,500 = €4,950 per year.
3. Werbungskosten = €7,200 + €1,500 + €800 + €4,950 = €14,450.
4. Taxable result = €12,000 − €14,450 = −€2,450. Offset against salary, this lowers tax by about €2,450 × 42% ≈ €1,029.
5. Cash flow before loan repayment = €12,000 − €7,200 − €1,500 − €800 = +€2,500: AfA is a tax deduction, not a cash payment.
6. Sale after 8 years for €340,000 with €5,000 selling costs. Cost base = €330,000 − 8 × €4,950 = €290,400. Gain = €340,000 − €5,000 − €290,400 = €44,600, taxable because the ten years have not passed.

Common mistake

Practice activity

Hypothetical: a flat costs €400,000 plus €40,000 incidental costs; land share 30%; completed in 2024 (3% AfA). Annual rent €16,800, interest €9,000, maintenance €1,000, other non-recoverable costs €1,200. Marginal tax rate 35%. Calculate the AfA, the taxable result, the tax effect and the cash flow before repayment.

Key takeaways

• Rental income is taxed at your personal rate after deducting interest, running costs and AfA on the building only.
• AfA rates depend on the completion year; land is never depreciated.
• Under current law, private property sales within ten years are taxable unless owner-occupied as required.
• REIT shares fall under Abgeltungsteuer; open-ended real estate funds get a 60% or 80% partial exemption. Check with a Steuerberater.

Next step

In the final lesson, you will combine everything into a decision checklist.