German Capital Gains Tax on Overseas Property

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We will be relocating to Germany mid-2015 from Asia and urgently need to find out our exposure to German capital gains tax and how to minimise it if we sell our home in Asia.

 

Details:

We will realise a significant capital gain if we sell our property.

It has been our family home for over 10 years.

There is no capital gains tax in the country where the property is located.

The country has no double taxation agreement with Germany.

We are EU citizens, but currently resident in Asia.

We will arrive in Germany around June 2015 and anticipate becoming resident there.

 

My questions are:

Would we be liable for capital gains tax in Germany if we sell the Asian property before we arrive in Germany, but during the 2015 German tax year? If so, how much?

 

Would we be liable for capital gains tax in Germany if we sell the Asian property after we arrive in Germany? If so, how much?

 

If yes to either of the above, how can we minimise our capital gains tax exposure?

 

We have a 50% mortgage on the property. Does this affect how the capital gain is calculated?

 

This is the single biggest issue that may make or break our move. We can’t find anyone to advise us on this in our current country. So many thanks in advance for any help, advice or opinions you can offer.

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I am sure our very own Toytown- PANDA will answer this soon with exact details, therefore I'll be brief upfront: the rule in Germany is that after holding a property for 10+ years you'll not be paying capital gains tax on the profits accrued when selling the property. I am reasonably sure the same applies whether you hold the property within Germany or outside.

But better that PANDA double-checks this and lets you know for sure.

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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Yes, as Starshollow said you have nothing to worry about.

 

You were right in thinking that if there is no double taxation treaty, you would have to pay tax in both countries, without the tax that was already paid in the first country being considered when calculating the tax in the second country.

 

However, profit from the sale of real estate that you have owned for longer than 10 years is also excluded from income tax in Germany according to §23 Absatz 1 Nr. 1 Satz 1 EStG, so you have the situation that you won't have to pay tax on it in either country.

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Starshollow and PandaMunich, thank you very much for your quick replies and for putting my mind at rest on this issue.

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Hello all,

i am am resident in berlin since 2011.

i owned a flat in London, bought in September 2004 in which I lived in until 31st March 2011 and which I rented until November 2013.  I sold the flat at the end of April 2014. I used the proceeds of the sale ( €170,000 ) for the deposit on a flat in Berlin. I am about to do my steuererklaerung for 2014, do I need to mention it? Will I be taxed on it? 

I have read read about the 10 year rule - sadly I am a few months short - but also read that it is different if the proceeds are re-invested in property. 

Thank you you all for your advice.

anne

 

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Sorry, but if you read articles 13 (1) and 23 (1) d) in the double taxation agreement between Germany and the UK then you will find out that you have to declare the profit (= selling price 170,000€ minus what you bought it for) in your German tax return.

 

It will not be taxed again (the UK has the taxation rights on that profit), but the profit will raise the tax rate that you will have to pay on your other income (= on the income for which Germany does have the taxation rights).
This lesser (compared to having to tax that profit in Germany) evil is called Progressionvorbehalt.

 

You can calculate the effect for yourself with this official Progressionsvorbehalt calculator:

Veranlagungsjahr: 2014
choose "Grundtarif" if you're single, "Splittingtarif" if you're married

Zu versteuerndes Einkommen in Euro: your German 2014 taxable income
Dem Progressionsvorbehalt unterliegende Ersatzleistungen und Einkünfte in Euro: your profit from the UK flat

 

********************************

 

And no, sorry, it does not matter at all whether you re-invest the money in another flat.

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I've seen a few post of similar character in the past and on those it was written that UK rental income was not taxable in Germany and didn't even affect the progression calculation either due to some old ruling that negative results couldn't be deducted therefore positive were not taxed hence it would only be taxable in the UK.

 

Is this no longer the case or is it a completely different tax issue when it comes to the capital gains tax issue when selling the property?

 

As far as reinvesting the profit would that be possible if it was originally the profit for once own flat in Germany which were then to be reinvested in another home (for own use) in Germany?

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It's a completely different issue.

 

And no, reinvesting (as a private person, there is an exception for businesses) no matter what property the profit comes from does not bring you any tax advantages.

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  • 1) 1Private Veräußerungsgeschäfte (§ 22 Nummer 2) sind  1. Veräußerungsgeschäfte bei Grundstücken und Rechten, die den Vorschriften des bürgerlichen Rechts über Grundstücke unterliegen (z. B. Erbbaurecht, Mineralgewinnungsrecht), bei denen der Zeitraum zwischen Anschaffung und Veräußerung nicht mehr als zehn Jahre beträgt. 2Gebäude und Außenanlagen sind einzubeziehen, soweit sie innerhalb dieses Zeitraums errichtet, ausgebaut oder erweitert werden; dies gilt entsprechend für Gebäudeteile, die selbständige unbewegliche Wirtschaftsgüter sind, sowie für Eigentumswohnungen und im Teileigentum stehende Räume. 3Ausgenommen sind Wirtschaftsgüter, die im Zeitraum zwischen Anschaffung oder Fertigstellung und Veräußerung ausschließlich zu eigenen Wohnzwecken oder im Jahr der Veräußerung und in den beiden vorangegangenen Jahren zu eigenen Wohnzwecken genutzt wurden;

 

-a German friend of mine found this after a bit of digging and as far as we can work out part 3 refers to a owner occupied house/flat being free from German capital gains tax if it has been owned and used solely by the owner however if it has been rented out at any time the owner would need to have lived in it him/herself the last three years before selling (I guess this being applicable unless it has been owned for more than ten years anyway)

 

-or are we misreading this?

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No, that's true, please see my post of 3. November 2011 in Taxes if house is credit free.

 

However, you were asking whether it makes a difference tax-wise in a case when you do have to pay capital gains tax on the profit from a flat sale whether you then use that profit to buy another flat. It doesn't.

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I see, but back to the start of the post where it was asked in profit on sale of property which had been privately owned for 9 years you said 

 

"

It will not be taxed again (the UK has the taxation rights on that profit), but the profit will raise the tax rate that you will have to pay on your other income (= on the income for which Germany does have the taxation rights).
This lesser (compared to having to tax that profit in Germany) evil is called Progressionvorbehalt.

"

 

Does this his them mean that profit from a privately used house or apartment will not be taxed even if owned for less than ten years but it will increase your tax rate for your normal salaried income in Germany?

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You are citing my reply of 15. June 2015 to Anita's question how her profit on a UK flat that she had owned for 9 years will be taxed in Germany.

That is a case regulated by the double taxation agreement between Germany and the UK.

 

You jumped in on 2. July and asked a completely different question: "As far as reinvesting the profit would that be possible if it was originally the profit for once own flat in Germany which were then to be reinvested in another home (for own use) in Germany?"

So you were asking whether when you sell a German flat, can you avoid paying tax on the profit by immediately reinvesting the money in another German flat. And I told you no, if you do have to pay tax that's not a way around it. If you didn't have to pay tax, e.g. if that German flat was your primary home or you had owned it for at least 10 years then you wouldn't have been worried about any tax, because then there wouldn't be any due.

This is a case governed by §23 Absatz 1 Nr, 1 EStG, i.e. by article 23 of the German tax code, not by a double taxation agreement.

No Progressionsvorbehalt involved in that case at all. If you do have to pay tax on that profit then that profit is added to your other income that year and the tax is calculated on the entire yearly income.

 

Can't you see that these are two completely different cases?


tl;dr: You are posting in the wrong thread, this was a thread about "German Capital Gains Tax on Overseas Property", not about German property. The taxation is different for these two cases.

 

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If I had known everything already without any doubts I wouldn't have asked. Didn't mean to offend anybody -I apologise if you took offence.

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Hi all,

 

First off thanks for your excellent advice. We are in a dilemma at the moment "to sell or to rent"

 

We bought a flat in 2015 and we recently moved into it and have a Mortgage. Now a great opportunity came knocking on our door and we will have to relocate to the US if we take up the offer.

 

My questions now are

1) Say after paying off the Mortgage we have no profit ex: we owe the bank 500K and sold the flat for 500K will we still be liable for capital gains tax ?

2) In the future the Rent will pay a huge part of the Mortgage how much will be the taxation on rental income. Will we be taxed even if we don't make any profit ? 

 

TIA

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Point 1: there is never any capital gains tax on a house only you lived in, see: 

If you meant that that flat was let after you bought it, then yes, since you haven't afterwards living in it long enough yourself, you would have to pay income tax on any profit from the sale. The profit is calculated as described in this post:

**************************************

 

Point 2: You only have to tax the rental profit. Mortgage interest reduces the rental profit, the part of your mortgage with which you pay back the capital (= Tilgung) does not reduce your rental profit. 

Details in:

 

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@PandaMunich I'm sorry to be dense but on another thread you said:

 

"Just think of this scenario: a few years down the line you sell the house and make a profit. You have to declare that profit in your German tax return, it too is a Progressionseinkunft, i.e. it won't be taxed again but it raises your German tax rate.

Now, since that house was let, the profit is:

 

selling price

- costs pertaining to the sale

- book value of that house

____________________________

= profit from sale

 

The "book value" is the original purchase price minus all the depreciations throughout the years you had let it."

 

 

so now I'm confused as in this thread, it sounds like if it's owned more than 10 years there is no tax implication.at all.

 

Anyway, to make this simple!  does the scenario you describe here (having one's progressive rate adjusted based on the sale profit) apply if the property in the US has been owned in for more than ten years?

 

or is there truly ZERO tax implication on *sale* of overseas property owned more than 10 years - not even a progressive adjustment regardless of who lived in it?

 

ETA: having already been bitten in the ass by the difference between paying "tax" and "having your progressive rate raised" (somehow  that's not "tax" :P ) I want to be really sure I understand this.

 

 (unfortunately I could not figure out how to get the original post embedded here - it can be found here http://www.toytowngermany.com/forum/topic/360810-division-of-property-outside-of-germany/?do=findComment&comment=3468201)

 

 

 

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The problem is that some people started posting off-topic in this thread, i.e. they started asking about German flats, instead of about "overseas property", i.e. non-German real-estate.

For a German flat, the profit made on selling it is tax-free as long as you owned that flat for at least 10 years, even if it was let all the time, according to §23 Absatz 1 Nr. 1 EStG.

 

**********************************************************

 

Your house on the other hand is in the USA, this means that the taxation of the sale profit is governed by the double taxation agreement between Germany and the USA, article 23 (3) a) Satz 2, and this means Progressionsvorbehalt (= having your tax rate on your other income raised by it):

So your case is basically the same as this UK case (from further up this thread):

**********************************************************

 

To embed the original post in here, you were just missing one step.

After having copied the URL of that comment into your answer, do another carriage return (= hit the Return key), and it will automatically transform the link into one of those nice embedded posts like the ones above.

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@PandaMunich - exactly right...that and the poster who was asking about the UK flat also had owned it LESS than 10 years when it was sold. 

 

Basically the reason I'm asking about this is that I have to formulate my cost basis for depreciation calculations for both countries, and it would appear to me that going with a lower depreciation value would be best, as otherwise all those tax "savings" you get on nonexistent profit just bang you when you sell the place.

 

eg: say I have 1k in profit before depreciation deductions.  My depreciation could be 4k to 7k (US, so maybe 3-4k here) depending on how much I fight to increase the cost basis by finding paperwork for improvements that were made just after buying the house, and how the land value is calculated ( the purchase in my case does not indicate the split of land to building value - there are several ways to imagine this split).  It appears it would be better to save myself the trouble, and just accept the lower depreciation deduction as I will still show no profit in the forseeable future, but will save 3k per year on the book value when/if I finally sell.  This is definitely a better strategy when calculating US basis/depreciation, and it sounds like the same is true here.

 

oder?

 

Or I guess I could just not work much in the year when I plan to sell the house.  ETA:  these tax rules have a funny way of inspiring me to make less money.  How is that good?

 

and thanks for the tip for embedding the post...still hate the quote feature ;)

 

 

 

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Yes, in your case, with zero rental profit (no use in any rental loss if you don't think that you will ever make a rental profit in later years, since only in the case of later rental profits would rental losses from earlier years come in handy), lower depreciation leads to a higher "book price" and therefore later on to a desirable lower profit from the sale.

 

Yes, progressive taxation generally has that effect on people. 

But just think, if you didn't earn anything that year, then no matter how high a profit you made from the sale, even if it put you at the maximum 45% income tax rate, the German state wouldn't get anything, since 45% of 0€ is still 0€ ;)

Now you know when exactly to take your sabbatical year...

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