German Tax Perspective · Typical Case
German Resident Renting U.S. Real Estate
If the owner lives in Germany and rents out real estate in the United States, the United States may generally tax the rental income as the situs state. For the German tax return, however, a separate income amount must still be calculated under German tax law. For directly held U.S. real estate, that income is generally exempt under the treaty but can increase the German tax rate through progression.
Germany–U.S. Tax Treaty
The United States Has the Primary Taxing Right as the Situs State
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. U.S. rental property is therefore generally subject to U.S. taxing rights.
If the owner is also tax-resident in Germany, the rental activity still forms part of the German tax analysis. Germany must determine the amount of income under German law and then apply the relief method under Article 23 of the treaty.
Basic Framework
Four Steps for the German Treatment
Identify the U.S. Property
Location, type of use, ownership form and any entity structure determine the further analysis.
Calculate the German Rental Result
Income, deductible expenses and depreciation are determined independently under German tax law.
Apply Treaty Exemption
For directly held U.S. real estate, the exemption method generally applies, with a possible progression effect.
German Tax Return
Germany Generally Does Not Tax the Rental Profit Again — but Still Needs It for the Tax Rate
For directly held U.S. real estate owned by a German resident, the U.S. real-estate income is generally excluded from the German tax base under the treaty.
The exempt income can, however, be relevant under Section 32b EStG for German progression. The U.S. rental result calculated under German rules can therefore increase the tax rate applied to other income taxable in Germany.
- calculate the German income amount independently
- review treaty exemption
- review progression under Section 32b EStG
- do not simply adopt U.S. taxable income
- document euro values
- review the ownership structure separately
German Income Calculation
Schedule E Is Not a German Rental-Income Calculation
The U.S. tax return can provide useful source data, but it does not replace the German tax calculation. Germany applies its own rules to rental income, deductible expenses, depreciation and currency conversion.
Rental Income
Actual rents and recoverable tenant payments must be recorded under German tax principles and translated into euros.
Financing Costs
Loan interest can generally be deductible where economically attributable to the rental activity; principal repayments generally are not.
Property Tax & Insurance
U.S. property taxes, insurance and other property-related costs can be relevant for the German calculation but must be classified under German law.
Repairs & Improvements
Repairs can be immediately deductible, while improvements or construction costs may have to be capitalized and recovered through depreciation.
German Depreciation & U.S. Depreciation
U.S. Depreciation Cannot Simply Be Copied Into Germany
U.S. residential rental property is depreciated for U.S. federal tax purposes under its own recovery rules. Germany instead applies the depreciation rules of Section 7 EStG.
For German purposes, land and building must be separated, the German depreciation basis must be determined, and historical amounts must be traced in euros. The German depreciation deduction can therefore differ materially from the U.S. depreciation expense.
Currency Conversion
The German Calculation Is Made in Euros
U.S. rents, interest, repairs, property taxes and other costs are usually denominated in U.S. dollars. For the German income calculation, the relevant amounts must be translated into euros under German principles.
Historical acquisition and construction costs and later improvements can also require separate exchange-rate treatment. Simply copying the U.S.-dollar totals from the U.S. tax return is therefore often inappropriate.
Typical Differences
Why U.S. Taxable Rental Income and the German Rental Result Can Differ
Different Depreciation
U.S. depreciation and German depreciation use different tax bases and recovery periods.
Different Expense Classification
An item can be currently deductible in the United States but capitalized for German purposes — or vice versa.
Exchange Rates
The German euro calculation can produce a different result even where the same nominal U.S.-dollar payments are involved.
Different Timing Rules
Payment timing and tax-period attribution can differ between the two national tax systems.
U.S. Tax Side
U.S. Taxation Continues in Parallel
The United States may tax income from U.S. real estate as the situs state. For a foreign person who is not resident in the United States, the applicable U.S. tax method, a possible Section 871(d) election, depreciation, filing obligations and state tax can all be relevant.
These U.S. topics are covered in detail on taxrep.us. For the German side, the key point is that the U.S. tax calculation must not be treated as identical to the German income calculation.
- U.S. federal rental taxation
- Section 871(d) election
- U.S. depreciation
- federal return
- state tax
- later sale and FIRPTA
Ownership Structure
Direct Ownership and an LLC Can Produce Different German Results
The treaty exemption described above concerns the classic case of directly held U.S. real estate. If the property is held through an LLC, partnership or corporation, the German classification of the entity must be determined first.
A U.S. LLC can be treated as transparent or non-transparent for German tax purposes. That determines whether the German resident is treated as earning the real-estate income directly or instead as holding an interest in a separate entity.
Later Sale
The German Tax History Becomes Especially Important When the Property Is Sold
If the U.S. property is later sold, the gain relevant for Germany can differ from the U.S. capital gain. Different depreciation, historical euro values, improvements and selling expenses can affect the German calculation.
For directly held U.S. real estate, the U.S. taxing right remains. Germany generally applies treaty exemption, potentially with a progression effect.
Documents Needed
Which Documents Should Be Available for the German Return?
Acquisition
Closing statement, purchase agreement, original purchase price, land/building allocation and acquisition-related costs.
Rental Activity
Rental statements, lease agreements, property-management reports and a summary of rents received.
Costs
Mortgage interest, property tax, insurance, repairs, management fees and other property-related expenses.
Tax History
U.S. returns, depreciation schedules, improvements and a traceable German depreciation/euro history.
Related Guidance
Related Topics
Frequently Asked Questions
German Resident With U.S. Rental Property
Do I have to pay German tax on U.S. rental income?
Do I still have to report the U.S. rental income in Germany?
Can I use the profit shown on Schedule E?
Can I use U.S. depreciation as German depreciation?
What changes if the property is held through a U.S. LLC?
Why is German progression important?
Germany–U.S. Tax Advice
Do You Live in Germany and Rent Out Real Estate in the United States?
We calculate the U.S. real-estate income under German tax law, prepare the German depreciation and euro calculation, review treaty exemption and progression, and coordinate the German treatment with the U.S. tax return.
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