Saving taxes with real estate: Overview

Various types of taxes occur in connection with real estate. However, resourceful investors and homeowners use various legal tactics to optimise taxes, which are presented in this article.

When you purchase a property, you first have to pay land transfer tax. Depending on the federal state, this amounts to 3.5 to 6 %. It does not matter whether you purchase the property as an investment or for your own use - there are noways to avoid this tax.
If you invest in a property as a capital investment, there are other taxes to consider in addition to the land transfer tax. On the one hand, we are talking about current taxes. If you rent out your property, you must properly pay tax on your income from renting and leasing. This income falls under income tax.
If you sell the property later, you will also be subject to speculation tax.
However, there are also ways to claim certain tax benefits. The following variants are described:

  • Avoid speculation tax (with example)
  • Real estate as an investment: What to deduct to save taxes?
  • Listed properties with significant tax saving opportunities
  • For semi-professional investors: Vermögensverwaltende GmbH (asset management limited liability company)

Omission of speculation tax

As a rule, speculation tax is incurred when you sell a property at a profit within a specified period of time. The amount of speculation tax depends on the income tax rate and the amount of the profit made. If the speculation period is observed or if other conditions are met, the speculation tax may not apply. Saving taxes with real estate may therefore not always be possible in the short term, but definitely after certain deadlines have expired.

Speculation tax when renting(income property)

If you rent out your property, the speculation period of ten years applies to you. The period begins at the time of the purchase contract. In order to avoid tax, you may only start your sales discussions after this period has expired, to be on the safe side.

Speculation tax for own use

In the case of owner-occupation, the speculation period is only three years. Own use only requires private use. This means that you do not have to live in the property yourself. It could also be your children. 

Calculate speculation tax

The amount of speculation tax depends - as already mentioned above - on your personal tax rate and the profit made. 

So let's assume that you have bought a property for 100,000 euros and now want to sell it for 150,000 euros. 

Retail value150,000 euros
less acquisition value100,000 euros
less ancillary costs for the sale10,000 euros
= Taxable profit40,000 euros
Tax rate40 %
= speculation tax16,000 euros

It should be noted that there is no fixed tax rate for speculation tax. The amount of tax to be paid is therefore always determined by your personal tax rate.

If you take into account the above-mentioned time limits for investment properties (ten years) or for owner-occupied homes (three years), there is a savings potential of €16,000 in this example.

Real estate as an investment: What can you deduct? 

If you rent out your property, you can deduct many items from your taxes. For example, the costs for financing (interest) are fully tax-deductible. You can also deduct household-related services, maintenance costs, account management fees and travel expenses. Most costs can be deducted in full. For some items, such as cosmetic repairs, 20% is deductible, but not more than 600 euros. It is important to note here that these costs have not already been declared as business expenses. 

In this context, it is still important to distinguish between maintenance expenses and production costs. Maintenance expenses include, for example, wallpapering, the installation of new windows, the renovation of a bathroom or the replacement of a roof. This includes all work that improves the existing condition of a property.
Production costs arise when the property is extended or the condition of the property is greatly improved. Thus, if you retrofit a balcony, add a conservatory or create new living space, these are production costs. For tax purposes, maintenance expenses and production costs are assessed differently. Maintenance expenses are income-related expenses and can be deducted immediately and in full . Production costs, on the other hand, must be depreciated over 50 years, unless the costs per construction measure are less than 4,000 euros net.

Caution: You should make absolutely sure that you do not spend more than 15% of the building's value on renovation work in the first three years. If you exceed 15%, these expenses are considered acquisition-related production costs and must be depreciated over 50 years. 

The tax depreciation of real estate should also be noted. Annually, around 2 % of the value of the building - not the value of the land - can be depreciated, which reduces the tax burden at least to a small extent. Since the depreciation period for real estate is usually 50 years, this does not represent a large savings potential, but should nevertheless be taken into account. For real estate built before 1925, 2.5% can be depreciated per year. 

The costs for the notary and the land register must be particularly scrutinised. This is because various services are provided at the notary appointment that are treated differently for tax purposes:

  • The registration of a land charge or mortgage is attributed to the financing costs, which can be deducted in full from the tax as income-related expenses in the annex "Renting and leasing" (in the year in which the costs are incurred)
  • The notarisation of purchase contracts, on the other hand, is considered part of the acquisition costs. Acquisition costs are depreciated over the entire useful life. The tax-reducing factor here is therefore to be considered rather in the long term.
Test now:
Does real estate as an investment suit you?

Tax Saving High Earners

One of the most efficient ways to save taxes as a high earner is to use listed properties as an investment. Special regulations apply and you receive unique tax benefits. Where are the advantages?

  • Shorter depreciation period. While "normal" real estate is depreciated over 50 years, listed real estate is only depreciated over twelve years. In this way, larger amounts can be deducted annually, which are significantly higher than the otherwise usual 2%. As a rule, the special depreciation of a listed property is up to 8% per year. 
  • Deducting renovation costs. If you renovate a listed property, you can further extend your benefit. The financial benefit of the tax allowance is further enhanced by the increase in value of the property as a result of the refurbishment. However, the renovation of a listed property usually requires sufficient financial means, so that this investment is mainly suitable for high earners

Unfortunately, the disadvantage of this plan is that the seller knows about the tax savings and regularly includes them in the purchase price. In some cases, the tax savings are even swallowed up completely by the higher purchase price. So make sure you get a fair price for the listed investment property - we will be happy to advise you on this.

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Save taxes with the help of an asset-managing GmbH 

With the help of an asset-managing GmbH, considerable tax advantages can still be achieved. The asset-managing limited liability company is basically an ordinary limited liability company, which is, however, established for the purpose of managing and administering existing real estate. It is important to note that the GmbH does not operate commercially, but only in an administrative capacity. With this form of GmbH, you also have to pay corporation tax of 15 % plus solidarity surcharge, but there is no trade tax

The asset-managing limited liability company is particularly suitable for commercial properties or other properties with which high returns are achieved. 

However, the tax advantage is lost if you withdraw profits from the asset-managing GmbH. In this case, capital gains tax must be paid. If you withdraw funds in the form of a salary, income tax is due. You should therefore make sure that the profits remain in the company and are reinvested there in a sensible way in order to actually benefit from the tax savings.  

Initial consultation: Saving taxes with real estate

We inform you about the opportunities you have as a high-income earner to save taxes with an income-producing listed property. Arrange a consultation now.

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