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Saving taxes with real estate

There are various types of tax in connection with the topic of “property tax deductions”. However, resourceful investors and homeowners use various legal tactics for tax optimization, which we present in this article. We refer exclusively to the real estate tax situation in Germany.

When purchasing a property, the first thing you have to pay is real estate transfer tax. Depending on the federal state, this is between 3.5% and 6.5%. It does not matter whether the property is purchased as an investment or for personal use. There are no ways to avoid this tax.

When investing in a property as an investment, there are other taxes to consider in addition to land transfer tax. Income from letting and leasing is subject to income tax.

If the property is sold, there is also a speculation tax. However, there are also opportunities to take advantage of certain tax benefits:

Taxes on the sale of a property

As a rule, speculation tax is incurred when a property is sold for a profit within a specified period. 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 other conditions are met, 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: tax benefits of letting (investment property)

The speculation period of ten years applies to rented properties. The period begins on the date of the purchase agreement. In order to avoid tax, sales negotiations may only begin after this period has expired to be on the safe side.

Speculation tax for owner-occupation

The speculation period for owner-occupation is only three years. Own use only requires private use. This does not mean that the property has to be occupied personally. Instead, the children could live in it, for example.

Calculating speculation tax

As mentioned above, the amount of speculation tax depends on your personal tax rate and the profit made. So let’s assume that you bought a property for €100,000 and now want to sell it for €150,000.

Sale value 150,000 euros
Deduct purchase value 100,000 euros
Deducting ancillary costs for the sale 10,000 euros
= taxable profit 40,000 euros
Tax rate 42%
= Speculation tax 16,000 euros

It should be noted here that there is no fixed tax rate for speculation tax. The amount of tax to be paid is therefore always based on the personal tax rate. If the above-mentioned deadlines for investment properties (ten years) and owner-occupied homes (three years) are taken into account, there is a potential saving of €16,000 in this example.

Property as an investment: what can be deducted from property tax?

If you rent out your property, you can deduct many items from your taxes. For example, the costs of financing (interest) are fully tax-deductible. Household-related services, maintenance costs, account management fees and travel costs can also be deducted. Most costs can be deducted in full. It should be noted here that these costs have not previously been declared as business expenses.

A distinction must also be made between maintenance expenses and production costs. Maintenance expenses include, for example, wallpapering work, installing new windows, renovating a bathroom or replacing the 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. A retrofitted balcony, conservatory or newly created living space are manufacturing costs. Maintenance expenses and production costs are assessed differently for tax purposes. Maintenance expenses constitute income-related expenses and can be deducted immediately and in full for tax purposes. Production costs, on the other hand, must be depreciated over 50 years, unless the costs per construction measure are less than EUR 4,000 net.

Tax depreciation of the property itself is also an important factor. Every year, 2% of the building value – not the land value – can be depreciated, which further reduces the tax burden. For properties built before 1925, 2.5% can be deducted per year.

The costs for the notary and land register must be considered separately. Various services are provided at the notary appointment, which are treated differently for tax purposes:

  • The registration of a land charge or mortgage is added to the financing costs, which can be deducted in full from tax as income-related expenses in the “Renting and leasing” annex (in the year in which the costs are incurred)
  • The notarization 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 more likely to be long-term.

Saving tax for high earners

Listed properties as an investment are one of the most effective ways to save tax as a high earner. Special regulations apply and you receive unique tax benefits. What are the advantages of renting out a listed property?

Increased depreciation for listed properties

In addition to normal building depreciation, listed properties are also eligible for listed building depreciation. This allows landlords to deduct 9% of modernization and renovation costs from their taxes each year for the first eight years. In the following four years, however, it is 7% per year. This is why listed properties with their tax benefits and high depreciation are particularly attractive for high earners.

High earners benefit from the tax advantages of listed properties

High earners benefit from the tax advantages of listed properties

The disadvantage of listed properties is that sellers are also aware of the tax savings, often price them in and try to book the economic advantage for themselves. In some cases, the tax savings are even completely wiped out by the increased purchase price. A fair price should therefore be ensured, especially for listed investment properties. We will be happy to advise you on this.

Save tax with the help of an asset-managing GmbH

With the help of an asset-managing GmbH, further significant tax advantages can be achieved. The asset-managing GmbH is basically an ordinary GmbH, but it was founded for the purpose of managing existing properties and managing them. It is important to note that the GmbH is not commercially active, but only manages the property.

With this form of GmbH, corporation tax of 15% plus solidarity surcharge must also be paid; however, trade tax is not applicable. The asset-managing GmbH is particularly suitable for real estate that generates high returns. However, the tax advantage is lost if profits are withdrawn from the asset-managing GmbH.

In this case, capital gains tax must be paid. If money is withdrawn in the form of a salary, income tax is payable. Profits should therefore remain in the company and be sensibly reinvested there in order to actually benefit from the tax savings.