German Tax Perspective · Sale Scenario
Sale of a U.S. Vacation Property
If a German tax resident sells a vacation property in the United States, the United States may generally tax the gain as the situs state. For German purposes, a separate gain calculation under German tax rules is still required. For directly held U.S. real estate, treaty exemption generally applies, but the gain can affect the German tax rate through progression.
Germany–U.S. Tax Treaty
The United States May Tax the Gain From U.S. Real Estate
Under Article 13 of the Germany–U.S. tax treaty, gains from the sale of immovable property may be taxed in the country where the property is located. A vacation property in the United States is therefore generally within U.S. taxing jurisdiction.
If the seller is resident in Germany, the German treaty-relief method must then be determined. For directly held U.S. real estate, the exemption method generally applies.
German Treatment
Germany Requires Its Own Property-Sale Gain Calculation
The capital gain reported on the U.S. tax return is not automatically the German gain. Germany determines acquisition cost, later capital expenditure, selling expenses, prior depreciation and currency conversion under its own tax rules.
For directly held U.S. real estate, the resulting German gain is generally exempt under the treaty. It can nevertheless affect the tax rate on other income taxable in Germany through Section 32b EStG.
- calculate the German gain independently
- reconstruct historical euro values
- take prior German depreciation into account
- review treaty exemption
- review German progression
- analyze the ownership structure separately
Gain Calculation
What Enters the German Calculation
Acquisition Cost
Purchase price, certain acquisition-related costs and the allocation between building and land must be reconstructed historically.
Improvements
Capital improvements and later construction expenditure can increase the German tax basis where the German rules require capitalization.
Selling Expenses
Broker fees, legal fees, closing costs and other expenses directly connected with the sale can be relevant.
Prior Depreciation
If the property was rented out for part of the holding period, the German depreciation history can affect the German gain calculation.
Currency Conversion
A U.S.-Dollar Gain Is Not the Same as a German Euro Gain
Germany calculates the disposal gain in euros. Historical purchase price, later investments and sale proceeds can therefore enter the calculation using different relevant exchange rates.
Currency movements alone can cause the German gain to differ substantially from the U.S. capital gain.
Vacation Property & Private Use
Private Use Does Not Change the U.S. Situs Principle
The fact that the property was used exclusively or primarily as a personal vacation home does not change the basic rule that the United States may tax the gain as the situs state.
For German tax purposes, however, it is necessary to determine whether and to what extent the property formed part of private assets, whether it was rented out during any period, and which German rules apply to a private disposal.
German Section 23 Analysis
Section 23 EStG Can Also Be Relevant for a U.S. Vacation Property
For privately held real estate, Germany must first determine whether there is a taxable private disposal under domestic law. The ten-year holding period and, where applicable, the owner-occupancy exceptions under Section 23 EStG can be relevant.
The treaty exemption analysis and the domestic German question of whether a taxable gain arises under Section 23 EStG are separate steps.
Periods of Rental Use
A Vacation Property Can Have Several Different Tax-Use Phases
Private Use Only
The property was used solely as a personal vacation home. In that case there will typically have been no ongoing German rental-income calculation or German depreciation.
Partly Rented
If the property was rented out during part of the year or holding period, German rental-income calculations, depreciation and allocation between private and rental use may be required.
Previously Rented, Later Private
A historic period of German depreciation can remain relevant when the property is later sold.
Short-Term Rental
For platform-based or vacation rentals, income, expenses and days of use should be documented carefully.
U.S. Sale
FIRPTA Can Tie Up Cash for a Foreign Seller
If a person who is treated as a foreign person for U.S. tax purposes sells U.S. real estate, FIRPTA withholding can apply. The standard rule is typically 15% of the amount realized, not 15% of the actual gain.
FIRPTA withholding is generally a prepayment of the final U.S. tax liability rather than the final tax itself.
- 15% of amount realized as the typical baseline rule
- not the same as capital gains tax
- a withholding certificate can be relevant in appropriate cases
- a federal return is generally still required
- state tax must be reviewed separately
- final tax depends on the U.S. gain calculation
U.S. Person or Non-U.S. Person?
FIRPTA Does Not Affect Every German Resident in the Same Way
A German tax resident can simultaneously be a U.S. citizen or another U.S. taxpayer. In that case, the seller is not in the same U.S. federal tax position as a German resident who is a foreign person for U.S. tax purposes.
The seller's U.S. status should therefore be established before closing. The U.S. tax treatment of the sale is covered in detail on taxrep.us.
Ownership Structure
An LLC or Corporation Can Change the Entire Analysis
The treatment described above principally concerns directly held U.S. real estate. If the vacation property is held through an LLC, partnership or corporation, the German tax classification of the entity must be determined first.
For an LLC in particular, Germany must determine whether it is treated as transparent or non-transparent. A sale of the property by the entity and a sale of the ownership interest can have very different tax consequences.
Documents
What Is Needed for the Cross-Border Gain Calculation
Acquisition
Purchase agreement, closing statement, purchase price, closing costs and allocation between building and land.
Investments
Documentation for renovations, additions, improvements and other capitalizable expenditure.
Use of the Property
Records of private use, rental periods, earlier rental statements and the German depreciation history.
Sale
Sales contract, closing statement, broker fees, FIRPTA documentation and evidence of other selling expenses.
Related Guidance
Related Topics
Frequently Asked Questions
Sale of a U.S. Vacation Property
Where is the sale of a U.S. vacation property taxed?
Does Germany have to calculate its own gain?
Is the gain taxable in Germany?
Does personal use of the vacation property matter?
What is FIRPTA?
What changes if the property is held through an LLC?
Germany–U.S. Tax Advice
Do You Live in Germany and Plan to Sell a Vacation Property in the United States?
We review the German gain calculation, treaty exemption, progression, Section 23 EStG, historical depreciation and euro values, and coordinate the German treatment with the U.S. sale taxation.
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