Capital Gains Tax On Property US Expat Living in Germany

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Hi All,

 

I was planning to sell my house in the US this year and recently relocated to Germany for work.  I'm living in Hamburg and earning my salary here in euros for the next 1 year and 2 months.  I don't intend to remain in Germany after that.  I have had the house for almost 5 years.  I was living in it from 2014-2017 until I moved abroad, first to China, and then just a few weeks ago to Germany.  I've been renting the house to my friend since 2017 when I moved out.

 

My understanding is that the US has taxation rights to the sale.  However, I would actually not be subject to capital gains tax in the US since I was living in the property for the minimum 2 out of the last 5 years.  I would, however, be subject to depreciation recapture and a fairly small "stamp tax" in Massachusetts.

 

I have spoken to multiple tax accountants in Germany through my work and they've given me conflicting answers on whether or not I would have to pay capital gains tax to Germany after the sale.  I'm hoping that somebody with experience could help to clarify.  I understand that if I had held the property for 10+ years or if I hadn't rented it out that I definitely wouldn't have to pay it, but unfortunately these situations don't apply to me.  I also understand that I can rent it out for one more year and sell it after moving and it wouldn't be an issue, but I would very much prefer to sell it now.

 

Please let me know in case more information is needed.  I appreciate any help that you can give me.

 

Thank you,

 

Jon

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No German capital gains tax, but the profit you make on the sale will have to be declared in your German income tax return and it will count as progression income, i.e. it will push up your German tax rate on your other income (German salary), this is called Progressionsvorbehalt: https://de.wikipedia.org/wiki/Progressionsvorbehalt

 

You can calculate the effect for yourself, by inputting into this official calculator: https://www.finanzamt.bayern.de/Informationen/Steuerinfos/Steuerberechnung/Progressionsvorbehalt/

  • Zu versteuerndes Einkommen in Euro: your German taxable salary
  • Dem Progressionsvorbehalt unterliegende Ersatzleistungen und Einkünfte in Euro: your US profit from the sale of your house, in €

So you may want to postpone the sale until 2021, so that you won't end up paying additional German tax because of that profit.

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Hi there, I'm writing to follow up with similar questions about the sale of a residential property in the US. I've consulted a German tax accountant, but I'm not sure if his information is correct. Here is the info:

 

-I'm a US citizen, but tax resident in Germany, where I'm currently residing.

-I co-own a flat with my mother in the United States. We've owned it for more than ten years and it has only ever been used as a residential property either by myself or my mother. My mother currently lives there, and has been living there since my move to Germany.

-My mother wants to sell the flat. We will pay some taxes in the US if we sell. BUT, as I am co-owner residing in Germany, I'm trying to understand my tax liability in Germany, as there will be profit from the sale of the flat.

-A German tax accountant told me that if we sell, we would have to pay 6% real estate tax (on the total real estate value of the flat), IN GERMANY, given that I am tax resident here. This, however, seems strange to me, given that the flat is located in the United States, and we are already paying taxes for the sale there. It may be that the sale affects my progression tax in Germany (based on other posts I've read by @PandaMunich elsewhere).

 

Any advice, especially as you seem to be the expert on this topic, @PandaMunich would be hugely appreciated!

 

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On 16.3.2019, 21:38:08, PandaMunich said:

No German capital gains tax, but the profit you make on the sale will have to be declared in your German income tax return and it will count as progression income, i.e. it will push up your German tax rate on your other income (German salary), this is called Progressionsvorbehalt: https://de.wikipedia.org/wiki/Progressionsvorbehalt

 

 

@PandaMunich

 

Hi Panda,

 

I have a question concerning your advice above.

 

If a German tax resident sold a German real property interest that they had acquired after 31.12.2008 and owned less than 10 years at a gain, would the gain be taxed in Germany as ordinary income or would it be subject to Abgeltungssteuer?

 

(I know that rental income is subject to ordinary income tax rates in Germany but I'm too lazy tonight to look up the answer to my question on real estate gain.)

 

The reason I ask is simple:  if the CHARACTER of an item of income makes it subject to Abgeltungssteuer which is has a maximum rate of 25% (+soli), how could progressionsvorbehalt be applied?

 

 

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@ everybody else: this is going to be legalese that is of no interest to a layperson, so just skip this post.

 

@Straightpoop

You are mixing things up, and I think the cause of the confusion is that you are thinking of the US term "capital gain", which doesn't translate 1:1 to the German term "Einkünfte aus Kapitalvermögen".

Profit from selling a house/apartment is not "Einkünfte aus Kapitalvermögen" which is subject to maximum 25% Abgeltungsteuer, but "sonstige Einkünfte" which is subject to your personal variable income tax rate.

 

There are 7 types of income under German income tax law, all set out in §2 (1) EStG:  https://www.gesetze-im-internet.de/estg/__2.html

  1. Einkünfte aus Land- und Forstwirtschaft,
  2. Einkünfte aus Gewerbebetrieb,
  3. Einkünfte aus selbständiger Arbeit,
  4. Einkünfte aus nichtselbständiger Arbeit,
  5. Einkünfte aus Kapitalvermögen,
  6. Einkünfte aus Vermietung und Verpachtung,
  7. sonstige Einkünfte im Sinne des § 22,

 

Einkünfte aus Kapitalvermögen = income from capital assets

Is declared in Anlage KAP, Anlage KAP-INV and Anlage KAP-BET.

Legal definition: §20 EStG:  https://www.gesetze-im-internet.de/estg/__20.html

This can be:

  • interest, or
  • dividends, or
  • profit from the sale of shares/funds/bonds (but only if you own less than 1% of that company. If you ever owned more than 1% within the last 5 years, then when you sell the shares in that capital company, §17 EStG dictates that the profit gets kicked out of "Einkünfte aus Kapitalvermögen" and that instead it's reclassified "Einkünfte aus Gewerbebetrieb" which is again taxed with your personal variable income tax rate)

These types of income are privileged, in that you pay only 25% Abgeltungsteuer on them (this is set down in §32d (1) EStG), even if your personal variable income tax rate is higher than 25%. This privilege was introduced a few years ago to make tax evaders become honest, since the Minister of Finance back then said "It's better to get 25% of something, than 42% of nothing."

If your personal variable income tax rate is lower than 25%, you pay that lower personal income tax rate also on the "Einkünfte aus Kapitalvermögen", see §32d (6) EStG.

Abgeltungsteuer is still income tax, it's just capped at 25%.

 

But again: this privilege is on the way out, there are plans to rescind this privilege (but they haven't yet come round to implementing this): 

Only for "Einkünfte aus Kapitalvermögen" does that date you mentioned, 31.12.2008, come into play, as a cut-off date for the purchase of shares/funds that you can then resell again without having to pay any tax on that profit: 

  • profit from the sale of shares bought until 31. December 2008 will always be tax-free (if you never owned at least 1% in that company)
  • the first 100,000€ of profit from the sale of funds bought until 31. December 2008 is tax-free

 

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

 

sonstige Einkünfte = other income

Is declared in Anlage SO.

Legal definition: §22 EStG:  https://www.gesetze-im-internet.de/estg/__22.html

 

This is mainly about:

  • pensions
  • profit from private sales of houses/apartments, currency, and sale of other articles that are not objects of daily use.

 

--> for profit from selling a house/apartment, there is a link from §22 Nr. 2 EStG to §23 EStG: "Einkünfte aus privaten Veräußerungsgeschäften im Sinne des § 23;"

"Sonstige Einkünfte" are subject to your personal variable income tax rate.

 

Only here do you have the 10 year minimum holding period for houses/apartments that not only you ever lived in, if you want the profit from the sale to be tax free, see §23 (1) Nr. 1 EStG:  https://www.gesetze-im-internet.de/estg/__23.html

  • 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.

 

 

2 hours ago, Straightpoop said:

The reason I ask is simple:  if the CHARACTER of an item of income makes it subject to Abgeltungssteuer which is has a maximum rate of 25% (+soli), how could progressionsvorbehalt be applied?

 

If you look into the double taxation agreements (DTA), you will see that all the kinds of income that are privileged by 25% Abgeltungsteuer, i.e. interest, dividends or profit from the sale of shares/funds/bonds (as long as you own less than 1% of that company) are anyway income for whom the country of residency has the taxation right.

So you will never come to the application of Progressionsvorbehalt for that kind of income, because Germany will tax them outright with Abgeltungsteuer if they were the income of a German resident, so there is no need for Germany apply Progessionsvorbehalt.

 

Progressionsvorbehalt is only applied if all the following conditions are fulfilled:

  1. Germany didn't get the taxation rights on that income through the DTA, and
  2. There is a "progression clause" (= Freistellungsklausel) in that DTA, like the clause in article 23 Nr. 3 lit. a Sentence 2 of the double taxation agreement between Germany and the USA: "The Federal Republic of Germany, however, retains the right to take into account in the determination of its rate of tax items of income and capital excluded under the provisions of this Convention". This segues into German income tax law in §32b (1) Nr. 3 EStG which allows Germany to apply Progressionsvorbehalt to income that wasn't taxed by Germany because of a DTA: "Einkünfte, die nach einem Abkommen zur Vermeidung der Doppelbesteuerung steuerfrei sind, ...  so ist auf das nach § 32a Absatz 1 zu versteuernde Einkommen ein besonderer Steuersatz (= progression tax rate) anzuwenden. ", and
  3. That income, if it were German, would be taxed.

 

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@PandaMunich

 

Then I guess the answer to my question would be:

 

Taxable gains from the sale of German sited real estate (pursuant to § 22 para. 2 EStG read in conjunction with § 23 para. 1 EStG) are subject to ordinary (i.e. progressive) German income tax rates by default because they are not included in the exclusive list of items (generally speaking: those investment income items (Kapitalerträge) - including capital gains - listed in § 20 EStG) eligible for the 25% max rate prescribed by § 32b EStG (Abgeltungssteuer).

 

Hence, there would be no logical difficuly in applying Progressionsvorbehalt to gains realized on the sale of foreign real estate for which a DBA precludes direct German income taxation.

 

 

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On 15/05/2019, 21:38:44, PandaMunich said:

@ everybody else: this is going to be legalese that is of no interest to a layperson, so just skip this post.

 

Not at all, I found it interesting and useful in that it clarified a couple of things I hadn't realised.

 

Thanks very much Panda, your input is really helpful.

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