German Tax Perspective · Germany–U.S.
Real Estate: German Depreciation & U.S. Depreciation
A rental property located in the United States can be subject to both U.S. depreciation and a separate German depreciation calculation. The two systems use their own tax bases, depreciation periods, currency values and sale consequences. U.S. depreciation therefore cannot simply be copied into the German tax return.
Two Tax Calculations
One Property Can Have Two Different Depreciation Histories
If the owner lives in Germany and rents out real estate in the United States, a separate income calculation under German tax law is generally required for German purposes. The depreciation deduction shown on the U.S. tax return is only a U.S. tax figure.
Germany determines independently which part of the acquisition or construction cost is attributable to the depreciable building, which German depreciation rate applies, and how the relevant amounts are recorded in euros.
Main Differences
Where the German and U.S. Systems Can Diverge
Tax Basis
Purchase-price allocation, acquisition-related expenses and subsequent improvements can be treated differently in the two countries.
Depreciation Period
Germany and the United States use different statutory depreciation or recovery periods.
Currency
Germany calculates in euros, while the U.S. tax calculation is typically in U.S. dollars. Exchange rates can affect basis, annual depreciation and the gain on a later sale.
Germany
German Depreciation Is Determined Under Section 7 EStG
German tax law provides statutory straight-line depreciation rates for buildings. For many buildings completed after December 31, 2022 that are not subject to the special rule for certain business buildings, straight-line depreciation is generally 3% per year. Older buildings are commonly depreciated at 2%, or 2.5% where the building was completed before 1925.
A shorter actual useful life can, where the statutory requirements are met, support a higher depreciation deduction. The controlling analysis remains the German tax treatment.
- separate building from land
- land is not depreciable
- determine German acquisition and construction costs
- identify the applicable German depreciation rate
- consider a shorter actual useful life where appropriate
- document annual values in euros
U.S. System as the Parallel Calculation
U.S. Residential Rental Property Is Typically Depreciated Over 27.5 Years
For U.S. federal tax purposes, residential rental property under the General Depreciation System is typically depreciated on a straight-line basis over 27.5 years. U.S. rules also determine basis, the placed-in-service date, applicable conventions and the treatment of improvements independently.
This U.S. depreciation is important for the U.S. tax return but does not replace the German depreciation calculation.
Tax Basis
Even the Starting Values Can Differ Between the Two Countries
Building vs. Land
Only the building portion is depreciable. The allocation of total purchase price between the building and land must be supportable for German tax purposes.
Acquisition-Related Expenses
Certain closing costs, legal fees and other acquisition expenses can form part of tax basis. German classification must be performed independently.
Improvements
New roofs, additions or substantial modernization can increase tax basis and can create a separate depreciation history.
Furniture and Equipment
Furniture, appliances and other movable assets can have different useful lives from the building and should be documented separately.
Currency Conversion
The German Depreciation History Has to Be Built in Euros
For U.S. real estate, purchase price, closing costs, improvements and later sale proceeds are usually denominated in U.S. dollars. For German tax purposes, the relevant amounts must be translated into euros under German principles.
This means that even identical nominal U.S.-dollar values can produce a different tax history in Germany. Over a long holding period, currency movements can become material.
- retain the historical purchase price
- document the building allocation separately
- track closing costs and improvements individually
- document relevant EUR/USD exchange rates
- carry forward German annual depreciation amounts
- maintain the U.S. basis separately in parallel
Rental Income
The Ongoing Rental Result Can Also Differ Between the Two Countries
For a German resident with U.S. rental property, the United States may tax the real-estate income as the situs state. A German income amount is nevertheless needed for the German treaty analysis, especially where the exempt income remains relevant for progression.
Different depreciation deductions, different expense rules and currency effects therefore often mean that U.S. taxable rental income and the amount relevant for German purposes are not the same.
U.S. Return
Rental income and depreciation are determined under U.S. federal tax rules.
German Return
Income is calculated independently under German tax law and is then classified under the treaty.
Later Sale
Different Depreciation Histories Produce Different Gains on Sale
Depreciation claimed during the rental period affects the later tax basis. Because the two countries can have different depreciation histories, the U.S. gain on sale can differ materially from the gain relevant for German purposes.
In the United States, depreciation recapture or Section 1250 rules can also become relevant. That U.S. characterization does not automatically control the German treatment; the German gain calculation and treaty analysis must be performed separately.
Common Errors
What Often Goes Wrong With U.S. Real Estate
Copying U.S. Depreciation
The amount from Schedule E or U.S. tax software is copied into the German calculation without a separate German analysis.
Failing to Exclude Land
The entire purchase price is depreciated even though land itself is not depreciable.
Maintaining Only USD Values
The German tax history is tracked only in U.S. dollars even though euro values are required for German purposes.
Not Tracking Improvements Separately
Later capital expenditures are not allocated correctly to tax basis and the relevant depreciation schedule.
U.S. Tax Perspective
MACRS and Depreciation Recapture Are Covered in Depth on taxrep.us
This page explains depreciation from the German cross-border perspective. The full U.S. analysis of MACRS, GDS/ADS, placed-in-service rules, conventions, improvements, adjusted basis and depreciation recapture is covered on taxrep.us.
Open U.S. tax perspective on taxrep.usRelated Guidance
Related Topics
Frequently Asked Questions
German Depreciation & U.S. Depreciation
Can I use the U.S. depreciation amount in my German tax return?
What is the German depreciation rate for buildings?
How long is U.S. residential rental property depreciated?
Can land be depreciated?
Why can the gain on a later sale differ between Germany and the U.S.?
Why is a German calculation needed if the income is treaty-exempt?
Germany–U.S. Tax Advice
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