Capital Gains Tax and Holding Period for Real Estate

Asset or Everyday Object?

Assets include valuable items that are not everyday objects: antiques, gold, art, gemstones, and collectibles.

Regarding a ruling on the resale of football tickets, the German Federal Fiscal Court (BFH) stated:

Everyday objects are assets typically acquired for use. The asset must not have the capacity to generate income. If an asset has both a usage and a value appreciation component, one must consider whether there is a capacity for value appreciation, i.e., whether such items are also purchased as an investment. A ticket is not an everyday object but is only suitable for one-time use on a specific day. Since demand for Champions League final tickets far exceeds supply, they are acquired by many as speculation objects with guaranteed profit. The black market for these is huge. Thus, a value appreciation component is given.”

On the topic of “daily use,” the Federal Fiscal Court stated in another ruling that use every single day is not necessary for something to be considered an everyday object.

If you sell used furniture, clothing, or your used car, you will hardly ever make a profit, i.e., sell it for more than the original purchase price.

If these everyday objects were also subject to income tax (or “capital gains tax”) upon sale, it would mostly result in a loss, which could then be consistently deducted from taxes.

Therefore, it is unsurprising that tax legislation excludes everyday items entirely to avoid a loss for the state.

Different Holding Periods for Real Estate and Other Assets

The holding period for real estate is 10 years.

For other assets, it is 1 year.

The sale of stocks and other securities does not qualify as a sale transaction but as income from capital assets, for which capital gains tax is due without any holding period.

Existing Holding Period Continues in Case of Inheritance or Gift

For property inherited or received as a gift, the holding period that the decedent or donor started at the time of purchase continues.

Example: The decedent bought the property 7 years ago and bequeaths it. The heirs can sell the property tax-free after 3 more years, as the 10-year holding period will then (7 years + 3 years) be complete.

Calculating Capital Gains

Capital gains are not simply the difference between the sale price and the purchase price. You can reduce this amount by additional expenses to determine the taxable capital gain.

Broker and notary fees and other costs associated with the sale can be deducted from the capital gain.

Exceptions to the Real Estate Holding Period

Besides the unfavorable rule for real estate sellers that the holding period is 10 years instead of just 1, there are also favorable rules.

For real estate, capital gains tax is waived even within the holding period, i.e., for a sale less than 10 years after purchase, if:

• The seller lived in the property in the year of sale and in the two preceding years. It suffices if you occupied the property for one day in the year of sale, throughout the previous year, and one day in the second year before sale. The Federal Fiscal Court ruled this way in 2019:

…not harmful if the taxpayer used the property for personal residential purposes in the year of sale at least for one day, continuously in the previous year, and for at least one day in the second year before the sale.

Thus, you could live in the property on December 31, 2024, stay through 2025, and again on January 1, 2026. From January 2, 2026, you could rent it out until the end of 2026, and then sell it just before New Year’s Eve 2026. Tax exemption would be granted.

Capital Gains Tax Rate

The capital gain is added to your employment income in the respective year. The tax rate depends on your personal tax rate.

In the example above, you would owe income tax, solidarity surcharge, and potentially church tax for the year of the real estate sale, as if you had earned 177,000 EUR gross. The capital gains tax rate is therefore variable and depends on the personal tax rate.

Your personal tax rate depends on total taxable income, tax class, marital status, and the number of children.

A sample calculation including the impact on social security contributions can be found below.

Impact of Capital Gains on Social Security Contributions

If the capital gain is taxable, voluntarily insured individuals in the statutory health insurance must pay health insurance contributions for all 12 months of the sale year up to the contribution assessment ceiling (Regional Social Court of Baden-Wuerttemberg).

This does not apply to compulsory insured individuals. The assessment base differs significantly between compulsory and voluntary insured individuals. For voluntary insured individuals, a broad range of income sources is considered.

Private real estate sellers may wish to avoid voluntary statutory health insurance in the sale year if they want to avoid these costs.

In voluntary pension insurance, this is not relevant since the contribution amount is chosen by the insured, who receives pension points in proportion to contributions paid.

In contrast, in statutory health insurance, higher contributions do not result in increased benefits.

For voluntary unemployment insurance, capital gains tax is not relevant, as contributions are a fixed amount regardless of income and other gains.

Calculating Capital Gains Tax Including Health Insurance

For compulsory health insurance, which most individuals have, the capital gain does not increase the assessment base for health insurance. For voluntarily insured individuals, however, it does:

The contribution assessment ceiling in statutory health and pension insurance is 62,100 EUR (as of 2024).

This means that voluntary health insurance for property sellers only incurs additional costs if, without the extra capital gain, they would still be below the assessment ceiling.

If you already earn more than 62,100 EUR per year without the capital gain, the capital gain will not lead to higher health insurance contributions.

For this example, we use an income below 62,100 EUR.

Example: 30 years old, no children, tax class 1, no church tax. Rounded values:

As shown in the calculation above, health insurance contributions for the voluntarily insured increase from 10,450 to 12,979 EUR, rising by approximately 2,500 EUR.

The capital gains tax of 41,014 EUR for a 100,000 EUR capital gain is the same for employees and the self-employed.

Note, capital gains tax is not always around 41%, as in the above example. If the seller, for example, already earns around 280,000 EUR or more per year, additional income, including capital gains, is subject to the so-called “wealth tax rate” of 45% from the first euro.