Capital Gains Tax and Holding Period for Real Estate

Asset or item of daily use?

Assets include valuable items that are not part of daily use: antiques, gold, art, gemstones, collectibles.

On the occasion of a ruling regarding the sale of football tickets, the Federal Fiscal Court stated:

Items of daily use are assets that are usually acquired for use. The asset must not be suitable for generating income. If an asset has both a usage component and a value appreciation component, the decisive factor is whether it is suitable for value appreciation, i.e. whether such items are also acquired as an investment. A ticket is not an item of daily use but is rather intended for one-time use on a specific day. Since the demand for Champions League final tickets far exceeds supply, such items are acquired by many as a speculative object with guaranteed profit. The black market is huge in this regard. Thus, a value appreciation component is given.

Regarding “daily use,” the Federal Fiscal Court also stated in another ruling that it is not necessary to use something every day for it to be considered an item of daily use.

If you sell used furniture, clothing, or your used car, you will rarely ever achieve a profit, i.e. a higher selling price than the original purchase price.

If such everyday items were subject to income tax (“speculation tax”) upon sale, this would usually result in a loss, which would consequently have to be deductible from taxes.

It is therefore not surprising that tax legislation simply excludes everyday items altogether to avoid losses for the state.

Different speculation periods for real estate and other assets

For real estate, the speculation period is 10 years.

For other assets, it is 1 year.

The sale of shares and other securities is not considered a sale transaction, but income from capital assets, for which capital gains tax is due instead (without speculation period).

Inheritance and gifts: existing speculation period continues

For heirs of real estate or recipients of real estate as a gift, the speculation period started by the testator or donor when purchasing the property continues.

Example: The testator purchased the property 7 years ago and now bequeaths it. The heirs can sell the property tax-free after 3 years, since the 10-year speculation period has then expired (7 years + 3 years).

Calculating the capital gain

The capital gain is not simply the difference between the sale price and the purchase price. You can reduce this difference by further amounts to arrive at the taxable capital gain.

Broker and notary fees and other costs related to the sale can be deducted from the capital gain.

Exceptions to the real estate speculation period

In addition to the – from the seller’s perspective – negative feature of real estate, namely that the speculation period here is 10 years instead of only 1 year, there are also positive rules.

For real estate, the speculation tax also does not apply within the speculation period, i.e. if the sale takes place less than 10 years after purchase, under the following conditions:

Exception 1: Temporarily rented, but at least “3 years” of own use before sale

• The seller temporarily rented out the property but lived in it during the year of sale and the two previous years. It is sufficient if you lived in the property for one day in the year of sale, continuously in the previous year, and for one day in the second year before sale. The Federal Fiscal Court ruled in 2019:

… it is harmless if the taxpayer used the property for their own residential purposes in the year of sale for at least one day, continuously in the previous year, and for at least one day in the second year before the sale.

Thus, it would be possible to live in the property on 31.12.2024, then throughout 2025, and finally again on 01.01.2026. From 02.01.2026, you could rent out the property for almost 11 months until just before the end of 2026 and then sell it before New Year’s Eve 2026. Tax exemption would be granted.

Exception 2: Never rented, resale in less than 3 years, even after one day

In §23 EStG it states, at the point where the 3-year rule is mentioned:

Assets are excluded if they were used exclusively for own residential purposes during the period between acquisition or completion and sale […]

This means that if the property was only used by the owner and never rented, the 3-year rule does not apply, and exemption from speculation tax applies even after e.g. one day.

However, in such a case (100% own use but less than “1 day + 1 year + 1 day,” no rental), it is advisable to provide a valid reason for the quick resale to avoid being classified as an abuse of legal arrangements.

In this online example, a serious reason (serious illness of a child) for the quick resale would likely be accepted, and the “3 years” rule would not need to be applied.

Video on 10 years and “1 year plus 2 days”

Here is a video from the tax law firm TaxPro GmbH about the first two cases, “10 years” and “1 year plus 2 days”, with particular focus on the details of the standard case “10 years”.

According to TaxPro, a child living in the property without the parent who owns it only fulfills the legal requirement of “own residential purposes” if child benefits are still being received for the child. This typically applies until the age of 25 at most, provided the child is still in education.

Amount of speculation tax

The capital gain is added to your employment income in the relevant year. The tax is determined according to your personal tax rate.

In the above example, in the year of the property sale, you would pay the same income tax, solidarity surcharge, and possibly church tax as someone earning a gross income of 177,000 EUR. The amount of speculation tax therefore varies individually and depends on the personal tax rate.

The personal tax rate in turn depends on total taxable income, tax class, marital status, and 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 persons in statutory health insurance must pay health insurance contributions up to the contribution assessment ceiling for all 12 months in the year of sale (Regional Social Court of Baden-Württemberg).

This does not apply to compulsory insured persons. The assessment basis differs significantly between compulsory insured and voluntarily insured persons. For voluntary members, a wide range of income sources are taken into account.

Private property sellers should therefore not have voluntary statutory health insurance in the year of sale if they want to avoid these costs.

For voluntary pension insurance, this is not relevant, as the contribution level is chosen by the insured, and pension points are earned in proportion to contributions paid.

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

For voluntary unemployment insurance, speculation tax is also irrelevant, since a fixed flat rate is paid, regardless of income or profits.

Calculation of speculation tax including health insurance

For compulsory insured persons in statutory health insurance – the majority – the capital gain does not increase the assessment basis for health insurance. For voluntary insured persons, however, it does:

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

This means that additional costs arise for the voluntarily insured property seller only if, without the additional income from the capital gain, they were still below the contribution assessment ceiling.

If you already earn more than EUR 62,100 per year without the capital gain, then the capital gain does not increase your health insurance contributions.

Therefore, in the following example, we use an income significantly below EUR 62,100.

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

As you can see from the above calculation, for the voluntarily insured, contributions rise from 10,450 to 12,979 EUR, i.e. by about 2,500 EUR.

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

Note that speculation tax is not always around 41%, as in the above example. If the seller already earns approx. 280,000 EUR per year without capital gains, then additional income, including capital gains, is taxed at the so-called “wealth tax rate” of 45% from the first euro.