Real estate can be a great way to invest. Especially in the last decade it has been an asset category whose development has been hard to beat, and it is an area to which mostly everybody somehow feels like he can relate. Everybody needs a roof over the head and the expenses are something that everybody who has ever paid rent has seen before – real estate tax, craftsmen utilities, insurance….
So from an experience point of view, it is fair to assume that a lot of folks are familiar with the category and in a decent area chances are good your property appreciates well over time.
The appreciation is an aspect to stay on top of, because once you feel like you are ready to move out and sell the question presents itself what a sale might trigger in taxes for you. Since most people care about income taxes at this point, this is also the point where it can get tricky for any expat who has German real property. This is for the following reasons:
- Currently and as a lumpsum statement German tax law allows for most pieces of real estate to be sold completely tax-free after a 10 year holding.
- Also, if you have used your place exclusively for your own living purposes (again, a few exemptions apply) you do not even need to stick to the 10 years rule.
So, awesome, right? Buy a place in a decent market, live in it for a while and then sell it tax-free for a killing… everybody wins with the exemption of the tax office you might think.
This may be true if you are only a German national, never held a Green Card or US citizenship and you are not moving out of Germany. Why all of these limitations? Well, here are a few good reasons:
- US citizens, Green card holders and other people who move to or from the US in the year of the sale, need to report their worldwide income and the US law knows no such thing as selling real property completely tax free. There is a fairly generous exempt amount for a main home, but it does not guarantee a full tax exemption.
- Just as well other countries might not even know an exemption at all, have different requirements for the exemption or plain and simple treat the sale as some other income for which there is no exemption.
- Certain tax treaty stipulations (or lack thereof) or national treaty-override clauses can reclass and/or re-assign the income and corresponding taxation rights bi- or unilaterally. This situation stands a good chance for double taxation where the mitigation means available are either limited by nature, or difficult to obtain for procedural reasons.
- Have you given any thought to the circumstance of your apartment not having appreciated, but maybe depreciated in value? Maybe because a big company in town moved out, a company is moving in which comes with noise, smell, traffic or other fallout, a source of health hazards is being discovered…. Then, since a profit would be (partially) tax-free, the loss would be correspondingly (partially) unusable for tax purposes. Wouldn’t it suck – you lose on your investment and can’t even cut the taxman in on it.
Long story short, of course real estate is not a bad asset to invest in. Chances are good that if you sell your main home of some years in a decent area you will get to enjoy the appreciation tax-free. But, also, as is with any other investment, you need to stay on top of its appreciation, its history and your future (cross-border) plans to make sure there is no (other) cut out of the big chunk of flesh.
If you own privately held real estate in Germany and feel like you need advice, please let us know. We are happy to help.
