This expert interview features Timo Blum. Timo has been a tax consultant since 2009. He has gained extensive experience in a medium-sized tax consulting company and worked for an international commercial law firm and a boutique specializing in real estate.
In 2017, Timo and Eugen founded Startup und Tax where they advise national and international startups on all tax-related matters. If you require professional tax advise, send Timo an email at: firstname.lastname@example.org
1) When buying property in Germany, which tax do buyers need to pay?
First, the acquisition of property is subject to the real estate transfer tax (short: RETT). The RETT needs to be paid to the relevant tax office. The tax rate is set by the respective German federal state where the property is bought, with rates varying between 3.5% and 6.5%:
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The tax base for the RETT is the purchase price of the property. Basically, both buyer and seller are liable to pay RETT. However, in practice, the buyer usually must bear the full RETT and other transaction costs (e.g. notary costs).
Tip: Expenses for movable assets are not subject to RETT. Therefore, it is advisable to include all movable assets (e.g. kitchen) and their purchase price explicitly in the purchase agreement – if it does not affect your financing.
2) It is possible to sell the property tax-free when the property is purely intended for own use? The law regarding this is quite ambiguous (§23 EStG). Can you explain what property owners need to pay extra attention to when selling their own use property?
Theoretically, the sale of any property is tax-free after a period of ten years between the purchase date and the sale date of the property, as long as the seller does not qualify as a commercial real estate trader but remains a private seller. As a basic rule, an individual is considered a commercial real estate dealer if he or she sells more than 3 properties in a 5-year period.
Furthermore, a property that was purely used for own purposes can be sold tax-free independent of the holding period.
In case the property was rented out and used for own purposes afterward, things are a bit more complicated. The sale is only tax-free if the property was used for own purposes in the year of the sale and the two prior years.
Tip: It is sufficient to use the property for own purposes on one day in the year of the sale and/or one day in two years before the sale. Only the middle year of the 3-year period needs to be a full year of own use.
Example: Tenants move out on December 20, 2015. Own use starts on December 30, 2015. The property is sold on January 2, 2017. The sale will be income tax-free.
3) As a property owner in Germany, it is mandatory to pay a property tax (“Grundsteuer”). Can you briefly explain how much property owners of an urban apartment should expect to pay on average?
The property tax is based on the taxation value of the property, which is set by the relevant tax office. This value depends on historical data for the property in question. The applicable tax rate may vary between different cities in Germany.
For example, the property tax for an 80 square meter apartment in Berlin (“Altbau”, located in a 1,500 square meter property and in good condition) amounts to 260 euros per year.
Tip: Inquire with the real estate agent about the size of this tax when buying a property.
4) As an own use property owner, are there any expenses that I can deduct from my taxable income (§ 35a EStG Abs.3)?
As a rule, property-related expenses are not deductible for own use property owners.
However, there is an exception for expenses for craftsman services that are related to the property. 20% of these expenses can be deducted from the income tax up to an amount of 1,200 euros per year.
Please note that only expenses for services (as opposed to material costs) can be deducted. Furthermore, it is mandatory to pay for the services via bank transfer. Paying in cash will not be recognized.
5) Many Hypofriend clients decide to buy property to move in themselves. After several years, they may decide to move and rent out their property. Is there anything that you would recommend to this group of people?
As stated before, there is a tax exemption for the sale of a property by individuals who do not qualify as real estate traders. Therefore, one option is to sell at once to claim the tax exemption for property that was solely own used. Even a short period of renting will be harmful in this case.
Another possibility is to rent the property and wait for a tax-free sale of the property until the holding period of ten years is over.
Which option is chosen depends on the mortgage chosen, the expected rental and appreciation return on the property, and the need for cash to buy elsewhere.
6) Do you have any tax recommendations for people who recently moved?
Most importantly: Do collect all receipts which are related to your income. This includes moving costs, flights, train tickets, hotel accommodation, and work equipment. We had several clients who lost more than 1,000 euros because they were unable to prove their work-related expenses to the tax authorities.