Since it is far more common in the US to own real estate it is also pretty common place to use a US home for creation of rental income, or sell it when moving.
As is the case with any other foreign cash influx we always recommend to have the transactions at least looked at even if one is certain that it will not or should not have a tax effect. This is because any US real property can have an effect on your German tax rate regardless of whether you think it should not. The biggest misperceptions occur in the following two areas:
- When renting your place out you report certain expenses along with the income. Not every item can be recognized 1:1 on the German tax system – for both good and bad. For example, the return of a security deposit would not amount to income under German law. Also, US depreciation differs from the German rules. For this reason, a US profit could turn into a German loss and vice versa. While the effect may not be large it needs to reported properly as the overreporting of expenses or the underreporting of income is as bad of a no-no in Germany as it is on the US side.
- When selling your US home, you might feel comfortable about the lack of any tax consequence because you are taking the family home exclusion. However, the requirements for this exclusion do not necessarily align with the German equivalent – especially when the home was used for rental purposes in purposes in previous years.
To make matters worse and to deviate a bit from the headline, but when selling German property, you do not owe capital gains tax at all under certain conditions. This can lead to a hefty tax result on the US side without any German tax to take credit for. Two examples:
- It is not uncommon in hot markets to make a profit which well exceeds the US family home exception thresholds.
- A US family home exclusion can only be taken so often – such limitation does not exist under German law.
Given all of the above we strongly advise you have the taxperts look into any of your real property transactions to make sure they receive proper tax treatment. For most clients real estate is not only about money but also comes with an emotional attachment. We would hate to see you lose out on tax breaks which could have been avoidable.
