Situation · Germany–U.S.
German Real Estate Owned by a U.S. Person
If a U.S. citizen or other U.S. taxpayer owns real estate in Germany, German real-estate taxation and continuing U.S. worldwide taxation overlap. Germany may generally tax rental income and gains from German real estate; on the U.S. side, the same income usually has to be reported again and coordinated through foreign tax credits.
Germany as Situs State
Germany Has the Primary Taxing Right Over German Real Estate
Under Article 6 of the Germany–U.S. tax treaty, income from immovable property may be taxed in the country where the property is located. For real estate located in Germany, Germany is therefore the situs state.
This applies in particular to rental income. Gains from the sale of directly held German real estate may also generally be taxed in Germany under Article 13 of the treaty.
If the owner is also a U.S. citizen or other U.S. taxpayer, U.S. tax liability does not end there. The United States generally continues to tax worldwide income, with double taxation typically coordinated on the U.S. side through foreign tax credits and the treaty rules.
Framework
Four Layers Have to Be Combined
German Tax
Rental income and capital gains are first determined under German income-tax law.
U.S. Tax
The U.S. taxpayer reports the same income again under U.S. tax law and in U.S. dollars.
Foreign Tax Credit
German income tax can generally be relevant as a foreign tax credit on the U.S. side.
Rental Income in Germany
German Net Rental Income Is Determined Under German Law
Income from renting German real estate generally constitutes rental income under Section 21 EStG. The starting point is gross rental income less deductible expenses under German tax law.
Whether an expense is immediately deductible, must be capitalized or is depreciable depends on German tax rules — regardless of how the same item is treated on the U.S. tax return.
- capture rental income in full
- review financing interest
- record management and administrative costs
- distinguish repairs from capital improvements
- calculate German depreciation
- allocate property tax and ancillary costs
- determine the German result in euros
German Property Calculation
Depreciation, Financing and Deductible Expenses Determine the German Result
Building Depreciation
The portion of acquisition or construction cost attributable to the building is depreciated under German rules over the applicable useful life.
Land
The land portion is not depreciable. Purchase price and acquisition costs must therefore be allocated appropriately between land and building.
Financing Interest
Interest can generally be deductible if economically connected with the rented property.
Maintenance
Repairs can be immediately deductible, while acquisition, construction or certain near-acquisition costs may need to be capitalized.
U.S. Worldwide Taxation
The U.S. Citizen Also Reports the German Property in the United States
A U.S. citizen generally remains subject to U.S. taxation on worldwide income even while resident in Germany. German rental income is therefore also reported on the U.S. federal income-tax return.
The U.S. tax calculation follows its own rules. U.S. depreciation, U.S. basis, exchange rates and the treatment of particular expenses can differ from the German figures.
German income tax paid on the rental income can generally be relevant for the U.S. foreign tax credit, subject to the applicable U.S. rules and limitations. Income from German real estate is generally foreign-source income for U.S. purposes.
Typical Germany/U.S. Differences
Why the Taxable Results Can Diverge
Depreciation
Germany and the United States can apply different depreciation periods, methods and tax bases.
Currency Conversion
Germany calculates in euros, while the United States calculates in U.S. dollars. Income, expenses, acquisition and sale can therefore produce different tax values.
Capital Improvements
Renovation and improvement costs can be treated differently as current expenses or capitalized costs in the two countries.
Foreign Tax Credit
The amount of German tax creditable in the United States depends on U.S. FTC rules and limitations and does not automatically equal the full German tax paid.
Sale of German Real Estate
Germany May Tax the Gain — but Section 23 EStG Is Crucial
For privately held real estate, Section 23 EStG is particularly important. A gain is generally taxable in Germany if the period between acquisition and sale does not exceed ten years.
Exceptions apply for property used for the owner’s own residential purposes during the statutory periods.
If the sale falls outside the ten-year period and the property is held as private property, the gain can generally be tax-free in Germany. For a U.S. citizen, however, that does not automatically mean the gain is tax-free in the United States.
- review the German acquisition date
- review the ten-year period under Section 23 EStG
- review the owner-occupancy exception
- document acquisition and improvement costs
- take prior German depreciation into account
- determine U.S. basis separately
- apply U.S. capital-gain rules separately
Cross-Border Trap
Germany Can Be Tax-Free While the United States Still Taxes the Gain
Sale After More Than Ten Years
A private real-estate sale can fall outside Section 23 EStG and therefore be tax-free in Germany.
U.S. Capital Gain
A U.S. citizen generally remains subject to U.S. tax on the sale of the German property.
No German FTC
If Germany imposes no tax on the sale, there is generally no German income tax available to offset the U.S. tax on that gain.
Principal Residence
For owner-occupied property, it should also be reviewed whether and to what extent the U.S. principal-residence exclusion rules may apply.
Direct Ownership or Entity?
A German GmbH or Partnership Changes the Analysis Fundamentally
This page primarily addresses German real estate held directly as private property. If the property is owned through a GmbH, KG, GmbH & Co. KG or foreign entity, the character of income, tax rates and treaty treatment can change substantially.
For a U.S. taxpayer, additional U.S. information reporting and entity-classification issues can arise. A German corporation can, for example, trigger Form 5471 and potentially CFC, Subpart F or GILTI considerations from a U.S. perspective.
The ownership structure should therefore not be evaluated solely by reference to German real-estate transfer tax, income tax or inheritance tax.
U.S. Reporting
Direct German Real Estate Is Not Automatically an FBAR Account
Directly Held Property
Foreign real estate held directly is generally not a financial account and is therefore not reportable on FBAR merely because it is real estate.
German Bank Account
A German bank account used for rent, financing or property expenses can, however, be reportable on FBAR and potentially Form 8938 if the applicable thresholds are met.
Entity Ownership
Interests in German entities can trigger separate U.S. reporting obligations even if the entity holds only real estate.
Foreign Tax Credit
Form 1116 is generally relevant for claiming credit for German income tax on the U.S. return.
Related Guidance
Related Topics
Frequently Asked Questions
German Real Estate Owned by a U.S. Person
Does a U.S. citizen have to report German rental income in both countries?
Can I use German depreciation directly on the U.S. return?
Is a sale after ten years also tax-free in the United States?
Is German real estate itself reportable on FBAR?
What changes if the property is held through a German GmbH?
Which country taxes first?
Germany–U.S. Tax Advice
Are You a U.S. Person Owning Real Estate in Germany?
We coordinate German rental and sale taxation with the U.S. tax return and review depreciation, cost basis, foreign tax credits, property sales and the U.S. consequences of German ownership structures.
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