Situation · Germany–U.S.
U.S. Real Estate While Resident in Germany
If you live in Germany and own real estate in the United States, the treaty treatment differs significantly from stocks or dividends. Rental income and gains from directly held U.S. real estate may generally be taxed in the United States as the situs state; Germany generally exempts this income for a German resident, while it may still affect the German tax rate through the progression mechanism.
Situs Principle
For Real Estate, the Country Where the Property Is Located Takes Priority
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. For real estate in Florida, California, New York or another U.S. state, the United States is therefore the situs country.
This applies in particular to direct use and rental of the property. Article 13 of the treaty also generally allows the situs state to tax gains from the sale of directly held immovable property.
For a taxpayer resident in Germany, Article 23 of the treaty then determines how Germany relieves double taxation. U.S. income that may be taxed in the United States under the treaty and is not covered by a specific credit provision is generally excluded from the German tax base.
Framework
Four Layers Should Be Analyzed Separately
U.S. Federal Tax
The United States taxes rental income and the later sale under its domestic tax rules.
State Tax
Depending on the state, additional state and local taxes may apply.
German Treaty Treatment
Germany generally exempts the U.S. real-estate income but can take it into account when determining the tax rate on other German-taxable income.
Rental Income
For Non-U.S. Persons, the U.S. Tax Method Is Crucial
For a nonresident alien, U.S. rental income may, without a special election, generally be treated as U.S.-source FDAP income subject to 30% tax on the gross amount.
For rented U.S. real estate, the election under IRC § 871(d) is therefore often central. It allows the rental activity to be treated as effectively connected income so that net income, after allowable expenses, is generally taxed at the ordinary progressive U.S. rates.
- capture gross rents in full
- review the § 871(d) election
- document property tax and operating costs
- capture management and repair expenses
- review financing interest
- claim U.S. depreciation where applicable
- review state-tax obligations separately
U.S. Income Calculation
Under Net Taxation, Expenses, Financing and Depreciation Matter
Rental Income
The starting point is the actual U.S. rental income received, including separately charged ancillary amounts where applicable.
Operating Expenses
Depending on U.S. tax law, deductible items can include management fees, insurance, property tax, repairs and other expenses related to the rental activity.
Financing
Mortgage interest and other financing costs must be reviewed separately under U.S. law and properly allocated to the property.
Depreciation
U.S. depreciation affects not only current taxable income but can also become relevant again on sale through depreciation recapture.
German Tax Return
Exempt U.S. Rental Income Can Still Increase the German Tax Rate
For a taxpayer resident in Germany, income derived directly from U.S. real estate is generally not subject to German income tax again because of the treaty exemption method.
However, subject to the requirements of Section 32b EStG, the income can affect the tax rate applied to other income that remains taxable in Germany through the progression mechanism.
For this purpose, the amount of foreign income generally has to be determined under German tax principles. U.S. taxable income should therefore not simply be copied into the German return without review.
Typical Differences
U.S. and German Real-Estate Calculations Can Diverge
Depreciation
Depreciable basis, useful life and the start of depreciation can differ between German and U.S. tax law.
Currency
For German purposes, income and expenses generally have to be valued in euros; annual totals expressed only in U.S. dollars may therefore be insufficient.
Repair or Improvement
Renovation and improvement costs can be classified differently under the two tax systems.
Financing Costs
Interest and other financing costs must also be evaluated under the respective national rules.
Sale of U.S. Real Estate
The United States May Tax the Gain — FIRPTA Is Only the Withholding Mechanism
Article 13 of the treaty allows the United States to tax gains from U.S. real estate. For a foreign seller, the FIRPTA rules also apply.
When a foreign person disposes of a U.S. real property interest, the buyer must generally withhold 15% of the amount realized. This amount is not a flat final tax on the gain; it is a withholding payment or security against the actual U.S. tax liability.
Depending on the expected actual tax liability, a FIRPTA withholding certificate can be requested in order to reduce the amount withheld.
- calculate the U.S. capital gain separately
- retain historical basis documentation
- document capital improvements
- consider depreciation recapture
- FIRPTA generally 15% of the amount realized
- review a withholding certificate early
- consider state tax on the sale
Germany on Sale
The Gain on Directly Held U.S. Real Estate Is Also Generally Treaty-Exempt
Directly Held Property
The gain from the sale of directly held U.S. real estate may generally be taxed in the United States under Article 13 of the treaty.
German Method
For a German resident, the gain generally falls under the exemption method in Article 23(2)(a) of the treaty.
Progression
Even an exempt capital gain can be relevant for German progression purposes under domestic German law.
Different Gain Calculations
The gain relevant for German progression purposes can differ from the U.S. taxable gain because the two countries apply different tax rules.
Direct Ownership or Entity?
LLCs, Corporations and Trusts Can Completely Change the Tax Analysis
This page primarily addresses directly held U.S. real estate. If the property is held through an LLC, partnership, corporation or trust, the first question is who is treated as earning the income for German and U.S. tax purposes.
A U.S. LLC in particular can be transparent for U.S. purposes but classified differently in Germany depending on its legal characteristics. This can change the applicable treaty article, character of income, treatment of losses and method of double-tax relief.
Estate planning, U.S. estate tax and liability considerations can also weigh against optimizing only for current income tax.
U.S. Person?
For U.S. Citizens in Germany, the Analysis Shifts
Non-U.S. Person
The U.S. real estate creates U.S. tax exposure because the property is located there. Germany then generally applies the treaty exemption method.
U.S. Citizen
The United States already taxes a U.S. citizen on worldwide income. The treaty's saving-clause and special credit mechanics must therefore also be considered.
State Tax
State income tax is separate from the federal treaty. Not every state follows treaty rules in the same way.
Estate Tax
U.S. real estate can also raise U.S. estate-tax questions. These are separate from the ongoing income-tax analysis.
Related Guidance
Related Topics
Frequently Asked Questions
U.S. Real Estate While Resident in Germany
Do I pay German tax on rental income from U.S. real estate?
How is U.S. rental income taxed for a German non-U.S. investor?
Can I deduct expenses and depreciation?
What happens when I sell the property?
Is the sale gain also taxed in Germany?
Is an LLC better for holding U.S. real estate?
Germany–U.S. Tax Advice
Do You Own U.S. Real Estate While Living in Germany?
We coordinate U.S. federal and state tax with the German treaty treatment and review rental income, § 871(d), depreciation, FIRPTA, property sales and the classification of LLC or other ownership structures.
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