U.S. Real Estate · German Residence
U.S. real estate in the German tax return: rental income, depreciation and treaty rules
If you live in Germany and own rental property in the United States, the U.S. property must also be considered in your German tax filing. Under the Germany–U.S. tax treaty, income from U.S. real estate may generally be taxed in the United States. Germany generally exempts qualifying U.S. real-estate income for a German-resident taxpayer, but the income can still affect the German tax rate. The German amount must be calculated under German tax rules rather than copied from Schedule E.
Article 6 Germany–U.S. treaty
U.S. real estate is generally taxable in the United States
Income from immovable property may generally be taxed in the country where the property is located. Rental income from a house, apartment or other real estate located in the United States is therefore generally within the U.S. taxing jurisdiction.
If the owner is also a German tax resident, the German method for avoiding double taxation must then be applied. For typical income from directly held U.S. real estate, Germany generally applies an exemption method.
Germany
Exemption generally means no direct German tax on the rental profit – but the German tax rate may still increase
Where the treaty exempts qualifying U.S. real-estate income in Germany, the foreign rental result can generally be relevant under the German progression proviso.
The foreign rental profit does not then directly increase German taxable income, but it can increase the tax rate applied to other income that remains taxable in Germany.
- determine the U.S. taxing right
- confirm the German treaty exemption
- calculate rental income under German rules
- review the progression proviso
- separate U.S. and German depreciation
- convert relevant amounts into EUR
- analyze a later sale separately
German tax calculation
Schedule E is not the German rental-income calculation
The U.S. tax return provides important source data, but it does not determine the amount relevant for German tax purposes. Rental income and deductible expenses must be calculated under German income-tax rules.
The same property can therefore show a different taxable profit or loss in Germany and the United States even though the underlying cash flows are identical.
German rental calculation
The U.S. rental activity must be recalculated under German rules
Rental income
Actual rents and other rental-related receipts are determined under German tax principles and translated into euros.
Financing costs
Mortgage interest can generally be relevant where the loan is economically attributable to the rental property.
Property tax
U.S. property taxes and comparable property-related expenses must be classified under German tax rules.
Repairs & maintenance
Repairs may be immediately deductible, while larger improvements can need to be capitalized and recovered through depreciation.
Property management
Management fees and other expenses directly connected with the rental activity can generally be considered in the German calculation.
Depreciation
German building depreciation is calculated independently from the U.S. depreciation schedule.
Depreciation
U.S. depreciation and German AfA are separate calculations
U.S. residential rental property is generally depreciated under U.S. MACRS rules. That depreciation schedule cannot simply be carried over into the German tax return.
For German purposes, acquisition costs, the building and land allocation, acquisition-related expenses and the applicable German depreciation rules must be determined separately.
- allocate purchase price between land and building
- include relevant acquisition costs
- determine the German depreciation start date
- apply the relevant German depreciation rate
- review later capital improvements separately
- use U.S. depreciation only as background information
Land and building
Only the building portion is depreciable
As under German rules generally, the land portion of the acquisition cost is not depreciable. The total purchase price must therefore be allocated appropriately between land and building.
A land/building allocation used on the U.S. tax return can be a useful source of information, but it does not automatically determine the German allocation.
Building
The portion of the acquisition cost attributable to the building generally forms the basis for German building depreciation.
Land
The cost attributable to land remains part of the acquisition cost but is not depreciated annually.
USD → EUR
The German tax calculation is prepared in euros
A U.S. rental-property accounting system will often be maintained entirely in U.S. dollars. For the German tax return, the relevant tax amounts must be determined in euros.
It is not always appropriate to convert the final U.S. net rental profit using one year-end exchange rate. Acquisition cost, current income and expenses, financing items and a later sale can require different conversion dates or methods.
Financing
A U.S. mortgage also requires a separate German analysis
Interest and principal repayments must be distinguished. Principal repayments are generally not current rental expenses, while interest can be relevant where the financing is economically connected with the rental property.
Foreign-currency loans can also create separate exchange-rate issues that should not simply be included in the ordinary rental-profit calculation.
Personal use and rental use
Mixed-use property requires an allocation of expenses
If a U.S. vacation home is used partly by the owner and partly rented to third parties, the expenses cannot automatically be allocated entirely to the rental activity. Rental days, personal-use days and specific costs should be documented.
Full-time rental
Where the property is used exclusively for rental purposes, allocation of ongoing property expenses is generally more straightforward.
Vacation property
Where there is personal use, rental use and vacancy, the German tax treatment must be determined based on the actual use.
Losses
A U.S. rental loss is not automatically a German tax loss
If Schedule E shows a loss, this does not establish that the property also generates a loss under German tax rules. Income, expenses and depreciation must first be recalculated independently.
Special German restrictions can also apply to losses from certain third-country activities. A negative U.S. rental result should therefore not simply be transferred into the German return.
Ownership structure
Direct ownership, an LLC and a partnership are not treated the same
The analysis changes significantly where the U.S. property is not owned directly by the individual but through an LLC, partnership, corporation or another entity.
Direct ownership
Rental income can generally be attributed directly to the individual and analyzed under the treaty article dealing with immovable property.
U.S. LLC
Germany must first determine whether the LLC is transparent or treated as a corporation. The U.S. disregarded-entity treatment does not automatically carry over.
Partnership or corporation
Entity ownership can change the character of the income and create additional German and U.S. filing obligations.
Sale of U.S. real estate
A sale requires a new calculation in both countries
When U.S. real estate is sold, the United States generally has the right to tax the gain. For a German-resident owner, the German tax treatment must then be analyzed separately.
The U.S. taxable gain can differ materially from the result under German tax rules.
- reconstruct historical acquisition cost
- track land and building basis separately
- account for German and U.S. depreciation independently
- include selling expenses
- perform USD/EUR conversion
- apply the treaty method
- consider FIRPTA withholding where applicable
Section 23 EStG
The German private-sale rules should also be reviewed
For privately held real estate, Section 23 EStG can be relevant for German tax purposes. Acquisition date, sale date and, where applicable, personal use can affect the German classification.
The fact that the property is located and taxed in the United States does not eliminate the need for this German analysis. Only after the German result is determined can the treaty treatment and any progression effect be applied correctly.
U.S. tax return
The property remains subject to U.S. tax filing rules
The U.S. filing obligations depend on whether the owner is a U.S. person or a nonresident alien and on the ownership structure. Direct rental activity by an individual is typically included in the owner's U.S. income tax return.
For a non-U.S. owner who is not resident in the United States, the U.S. treatment of rental income and any election to be taxed on a net basis should be reviewed separately.
U.S. person
For U.S. citizens and other U.S. tax residents, rental income generally continues to be reported through the normal U.S. individual income tax system.
Nonresident alien
For a German owner who is not a U.S. tax resident, Form 1040-NR and the special U.S. rules for income from U.S. real property can become relevant.
Foreign Tax Credit
U.S. tax is not simply credited against German tax where Germany applies the exemption method
For typical income from directly held U.S. real estate, the treaty generally uses an exemption method on the German side rather than a simple credit of U.S. tax against German tax.
For U.S. citizens, the U.S. return must still be coordinated separately with German tax. Whether a particular tax is creditable in the United States depends on the source of income, treaty treatment and the specific tax involved.
Property sale
FIRPTA withholding is not the same as the final U.S. tax
When U.S. real property is sold by a foreign owner, FIRPTA can require withholding in connection with the sale. This withholding must be distinguished from the final U.S. income tax liability on the transaction.
For German tax purposes, the withheld amount should therefore not simply be treated as the final U.S. tax on the gain.
Annual compliance
How U.S. real estate is prepared for the German tax return
Determine the ownership structure
First determine whether the property is held directly or through an LLC, partnership, corporation or other structure.
Determine treaty taxing rights
Classify the real-estate income under the Germany–U.S. treaty and identify the German relief method.
Compile U.S. rental data
Collect rent, property tax, mortgage interest, repairs, insurance, management fees and other property expenses.
Determine German acquisition cost
Translate purchase price and acquisition costs into euros and allocate the amount between land and building.
Calculate German depreciation
Replace the U.S. depreciation schedule with a separate German depreciation calculation.
Calculate the German rental result
Rental income and deductible expenses are determined under German tax law and in euros.
Apply the progression proviso
The foreign rental result calculated under German rules is included as required under the applicable treaty and German income-tax provisions.
Reconcile German and U.S. filings
Differences in taxable profit, depreciation, tax and currency treatment are documented so both returns can be reconciled.
Documents
Documents typically needed for the German calculation
Purchase documents
Purchase agreement, closing statement and records of acquisition-related costs.
Rental statements
Rental statements, property-management reports and information on vacancy and personal-use periods.
Mortgage
Loan documents and annual statements showing interest and principal payments.
Property expenses
Property tax, insurance, repairs, HOA fees, management fees and other property-related expenses.
U.S. tax return
Schedule E or other relevant U.S. forms together with the U.S. depreciation schedule.
Historical records
Acquisition cost, later improvements and prior German calculations where German tax residence already existed in earlier years.
Common mistakes
What often goes wrong when reporting U.S. real estate in Germany
Copying Schedule E profit
The U.S. rental profit is not automatically the rental result relevant under German tax law.
Using U.S. depreciation
A separate German building-depreciation calculation is required.
Not reporting the property at all
Treaty exemption does not automatically make the income irrelevant for the German return.
Crediting U.S. tax in Germany
Where the treaty uses an exemption method, the mechanism differs from the tax-credit method.
Using one year-end FX rate
Acquisition, payment and sale dates can require different currency-conversion treatment.
Ignoring an LLC structure
If the property is held through an LLC, the German entity classification must be analyzed before the real-estate income is calculated.
Related guidance
Related topics
Frequently asked questions
U.S. real estate for German residents
Do I have to report U.S. real estate on my German tax return?
Where is rental income from U.S. real estate taxed?
Do I also pay German tax on the U.S. rental profit?
Can I copy the Schedule E profit into my German return?
Can I use U.S. depreciation in Germany?
How are U.S. dollar amounts converted for German tax purposes?
What happens if my U.S. property generates a loss?
What happens when I sell the U.S. property?
Does the treatment change if the property is owned through an LLC?
Do I need two calculations for the same property?
Germany–U.S. tax advice
Do you live in Germany and own real estate in the United States?
We coordinate the German and U.S. tax treatment of your property, including the German rental-income calculation, depreciation, progression proviso, treaty treatment, U.S. rental income and, where needed, prior-year corrections and the tax treatment of a later sale.
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