German real estate · U.S. decedent · inheritance tax
German real estate of a U.S. decedent: German inheritance tax and treaty rules
If a person living in the United States leaves real estate in Germany, Germany can tax the acquisition even where neither the decedent nor the heir lives in Germany. German real estate is classic German-situs property. At the same time, if the decedent was a U.S. citizen or U.S.-domiciled, U.S. federal estate tax can also be relevant. The separate Germany–U.S. estate-and-gift-tax treaty coordinates the overlapping taxing rights.
German-situs property
German real estate remains taxable in Germany even if the decedent lived in the U.S.
If the decedent lived exclusively in the United States and neither the decedent nor the heir is subject to unlimited German inheritance tax liability, Germany can still tax certain German assets.
Under Section 2 ErbStG, limited German inheritance tax liability applies to German-situs property within the meaning of Section 121 BewG.
Real estate located in Germany is one of the classic categories of German-situs property. An apartment in Berlin, an apartment building in Munich or a vacation property in Germany can therefore trigger German inheritance tax even where the decedent lived exclusively in the United States.
Section 2 ErbStG · Section 121 BewG
Limited German inheritance tax liability where all relevant persons live abroad
If neither the decedent nor the recipient is a German resident for inheritance tax purposes, the key question is whether the estate contains German-situs property.
German real property
Land and buildings located in Germany generally constitute taxable German-situs property.
Residence in the U.S.
The decedent's foreign residence does not prevent limited German inheritance tax on German real estate.
Residence in the U.S.
An heir who lives exclusively in the United States can still owe German inheritance tax on German real estate.
Limited German tax liability does not automatically extend to the entire U.S. estate
If neither the decedent nor the heir is subject to unlimited German inheritance tax liability, Germany generally does not tax the worldwide estate.
The German tax claim is then concentrated on German-situs property. Depending on the facts, this can include German real estate, German business property and certain interests in German corporations.
German-resident heir
If the heir lives in Germany, the case becomes a worldwide acquisition
If the recipient lives in Germany, unlimited German inheritance tax liability generally applies. Germany then taxes not only the German real estate but generally the heir's entire acquisition.
The distinction between limited and unlimited German tax liability is therefore central in a U.S.-decedent case.
Generally limited German tax liability
Germany generally taxes German real estate and other qualifying German-situs property.
Generally unlimited German tax liability
Germany can generally tax U.S. and other foreign assets forming part of the acquisition as well.
Personal allowances
Personal allowances also apply under limited tax liability — but with special rules
The basic personal allowance depends on the relationship between the decedent and the heir. A child generally has a €400,000 allowance and a spouse generally has a €500,000 allowance.
Under limited German inheritance tax liability, however, Section 16(2) ErbStG can reduce the allowance proportionally by taking into account the part of the overall acquisition that falls outside German taxation.
The full €400,000 child allowance is not automatically available under limited tax liability
If the estate consists of German real estate together with substantial U.S. assets, the allowance available in Germany can be affected by Section 16(2) ErbStG.
U.S. Federal Estate Tax
For a U.S. citizen, German real estate can be part of the U.S. taxable estate
If the decedent was a U.S. citizen or domiciled in the United States for federal estate tax purposes, the U.S. generally considers the worldwide estate.
German real estate can therefore be included in the U.S. federal estate tax calculation.
- U.S. citizens: generally worldwide estate tax jurisdiction
- U.S.-domiciled persons: generally worldwide jurisdiction as well
- German real estate can form part of the U.S. gross estate
- Form 706 can be relevant depending on the size of the estate
- the treaty coordinates relief where both countries tax
Not a U.S. citizen?
U.S. residence alone does not always establish estate-tax domicile
For U.S. federal estate tax, domicile is the key concept. It is not identical to U.S. income tax residence under the substantial presence test or the green card test.
An individual can therefore be a U.S. income tax resident without automatically being U.S.-domiciled for estate tax purposes, and the reverse can also occur.
For a decedent who was not a U.S. citizen, the estate-tax domicile analysis should therefore be performed separately.
Article 5 Treaty
Germany has an express taxing right as the situs country
The separate Germany–U.S. estate-and-gift-tax treaty contains a specific rule for immovable property in Article 5.
Real estate located in Germany can be taxed by Germany as the situs country.
This does not necessarily exclude parallel U.S. taxation. For a U.S.-citizen decedent, the United States can generally tax the worldwide estate. The treaty then coordinates relief from double taxation.
Treaty residence
The decedent must first be assigned to the appropriate treaty residence.
German real estate
Germany has a specific taxing right as the situs state.
Double taxation
The credit mechanism is coordinated under the treaty's specific rules.
Article 11 Treaty
Which country gives the tax credit?
Where a U.S. decedent owns German real estate, both Germany and the United States can tax the same asset.
The treaty does not necessarily eliminate double taxation through an exemption. In many cases, relief is provided through a foreign tax credit.
Which country credits the other country's tax depends particularly on the decedent's treaty residence and the Article 5 classification of the property.
Treaty residence
U.S. citizenship can have a special role under Article 4
The estate-and-gift-tax treaty has its own residence definition. On the U.S. side, U.S. citizenship can itself be relevant to treaty residence.
If the decedent also retained a residence connection to Germany, dual treaty residence can arise and the Article 4 tie-breaker rules become relevant.
Article 4(3) also contains a special ten-year rule for certain citizens. It must be distinguished from Germany's domestic five-year rule under Section 2 ErbStG.
Valuation
German real estate is valued under German valuation law
German inheritance tax applies the German Valuation Act. The tax value is generally determined as of the date of death.
A property value used for U.S. estate tax purposes is not automatically binding for German inheritance tax.
Comparable-value method
For certain residential properties, a comparable-value approach can be relevant.
Income approach
For rented properties, an income-based valuation method can become relevant.
Cost approach
If an appropriate comparable or income method cannot be used, a cost-based method can apply.
U.S. Form 706 and the German inheritance tax return can show different property values
U.S. estate tax generally focuses on fair market value, while Germany applies the specific valuation methods of the German Valuation Act.
A difference between the U.S. and German values is therefore not automatically an error. Both values should, however, be documented consistently and supportably.
Mortgage & estate liabilities
Financing can reduce the German inheritance tax base
If the German property is subject to a mortgage or other loan, the underlying liability can potentially be deductible as an estate liability under Section 10 ErbStG.
The key issues are whether the debt is legally attributable to the estate and how closely it relates to the property subject to German inheritance tax.
Property value
The German tax value of the real estate is determined first under German valuation rules.
Debt separately
The financing is not automatically netted against the property value but is reviewed separately as a potential deductible estate liability.
Direct ownership or entity
German real estate held through an entity is not automatically treated as directly owned property
If the U.S. decedent owned the real estate directly, the case involves classic German real property.
If the property was instead held through a GmbH, partnership, LLC or another entity, the heir may receive an entity interest rather than the property itself.
The legal form, ownership percentage and applicable treaty allocation rule must then be analyzed separately.
Direct real estate
Article 5 of the treaty applies directly.
Property held by a GmbH
The heir receives GmbH shares. For limited German tax liability, the ownership threshold under Section 121 BewG can become relevant.
Real estate partnership
Partnership interests can fall under their own treaty allocation rules.
Trust
German real estate can also be held through a U.S. trust
In a trust structure, the first question is whether the trust itself, the settlor or a beneficiary is treated as holding the property for German tax purposes.
The settlor's death does not always result in an immediate direct acquisition of the German real estate by the beneficiary.
The trust agreement, applicable U.S. law and the actual powers of the parties must be reviewed.
Examples
Typical cases involving German real estate and a U.S. decedent
U.S. father leaves a Berlin apartment to son in New York
Both individuals live in the United States. Germany can nevertheless tax the Berlin apartment under limited German inheritance tax liability. The personal allowance must be reviewed under Section 16(2).
U.S. mother leaves a Munich house to daughter in Germany
The daughter is subject to unlimited German inheritance tax liability. Germany therefore generally taxes the entire acquisition, not only the Munich property.
U.S. citizen with a worldwide estate and German real estate
The United States can generally tax the worldwide estate of a U.S.-citizen decedent. Germany simultaneously taxes the German real estate. The treaty must coordinate double taxation.
German property subject to a mortgage
The German property value and the outstanding debt must be determined separately. Deductibility of the debt must be reviewed under Section 10 ErbStG.
Property held through a German GmbH
The heir may receive GmbH shares rather than direct real estate. Section 121 BewG, the ownership percentage, valuation and treaty allocation then require separate analysis.
Property held in a U.S. revocable trust
It must be determined to whom the property is attributed for German tax purposes before and after death and when a taxable acquisition occurs for the beneficiary.
After the inheritance
Rental or sale creates new tax issues
After the property is inherited, further German and potentially U.S. tax issues can arise.
Rental income
Rental income from German real estate is generally subject to German income tax.
Sale
A later sale can produce German income tax consequences. Timing, use and acquisition history are important.
U.S. reporting
If the heir is a U.S. citizen or otherwise subject to U.S. tax, U.S. income tax and information-reporting obligations can also apply.
Process
How the inheritance should be reviewed
Tax status
Determine residence and citizenship of the decedent and heir.
Ownership
Distinguish direct real estate from an entity or trust structure.
Valuation
Determine the German tax value and relevant estate liabilities.
Treaty
Coordinate U.S. estate tax and German inheritance tax under Articles 5 and 11.
Documentation
Documents typically required
Land register
Land register extract and evidence of ownership at the date of death.
Property records
Year of construction, floor area, use, rental income and other information required for valuation.
Financing
Loan documents and outstanding debt at the date of death.
Decedent
Residence, citizenship and U.S. estate-tax domicile.
Estate
Will, trust agreement, probate records and estate inventory where available.
U.S. tax records
Form 706, estate tax calculation, assessment and evidence of payment where relevant.
Common mistakes
Issues frequently overlooked with German real estate of a U.S. decedent
“Everyone lives in the U.S., so Germany cannot tax anything”
German real estate remains German-situs property even under limited German inheritance tax liability.
Automatically applying the full personal allowance
Under limited tax liability, Section 16(2) ErbStG can reduce the allowance proportionally.
Ignoring U.S. estate tax
For U.S. citizens and U.S.-domiciled decedents, German real estate can form part of the worldwide U.S. estate.
Confusing income-tax residence with estate-tax domicile
The U.S. residence concepts are different.
Using the U.S. value automatically for Germany
German inheritance tax applies the valuation rules of the German Valuation Act.
Treating an entity-owned property as direct real estate
For a GmbH, partnership or trust, the asset actually inherited must first be identified.
Further guidance
Related topics
Frequently asked questions
German real estate of a U.S. decedent
Can German inheritance tax apply if the decedent lived in the United States?
What if the heir also lives in the United States?
What if the heir lives in Germany?
Does a child living in the U.S. receive the €400,000 allowance?
Can German real estate also be subject to U.S. estate tax?
Can Germany tax the property under the treaty?
How is double taxation relieved?
How is the property valued in Germany?
Can a mortgage be deducted?
What if the property is owned by a GmbH or a trust?
Germany–U.S. tax advice
Did a U.S. decedent leave real estate in Germany?
We review limited or unlimited German inheritance tax liability, personal allowances, valuation and financing, classification under Article 5 of the estate-and-gift-tax treaty, and coordination with potential U.S. federal estate tax. Entity and trust structures are also included in the cross-border analysis.
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