Inheritance · Gifts · U.S. Real Estate
U.S. real estate in inheritance and gift cases
If U.S. real estate is inherited or gifted and there is a German tax connection, both countries can become relevant. Germany can tax the transfer of U.S. real estate where unlimited German inheritance or gift tax liability applies. At the same time, the United States has its own taxing rights as the situs country. Article 5 of the Germany–U.S. estate-and-gift-tax treaty specifically addresses real property, while Article 11 coordinates double taxation.
Section 2 ErbStG
Germany can tax real estate located in the United States
If the decedent, donor or recipient qualifies as a German resident within the meaning of Section 2 ErbStG at the relevant time, unlimited German inheritance or gift tax liability can apply. Germany then generally taxes the worldwide acquisition.
A property located in Florida, California, New York, Texas or another U.S. state therefore does not fall outside the German tax base merely because it is located abroad.
The starting point is German domestic law. Only in the next step is the Germany–U.S. estate-and-gift-tax treaty applied to coordinate the overlapping taxing rights.
Analysis
Four steps determine the tax treatment
Persons
Where do the decedent or donor and the recipient live, and what citizenships do they hold?
Property
Where is the real estate located and through what legal ownership structure is it held?
Valuation
What value and related liabilities must be taken into account for German tax purposes?
Treaty
How are U.S. and German taxes coordinated under Articles 5 and 11?
U.S. situs
The United States can tax U.S. real estate regardless of German residence
Real property located in the United States has a direct U.S. situs. It can therefore be relevant for U.S. estate or gift tax even where the owner is not a U.S. citizen and lives outside the United States.
For U.S. citizens and persons domiciled in the United States, U.S. estate and gift tax jurisdiction can extend further. For non-U.S. persons, the classification of property as U.S.-situs property is particularly important.
The detailed U.S. estate-and-gift-tax calculation depends on factors such as status, ownership structure, available exemptions and the specific transfer. Detailed U.S. rules are covered separately on taxrep.us.
Article 5 Treaty
The treaty gives the situs country a taxing right
The separate Germany–U.S. convention covering estate, inheritance and gift taxes specifically addresses immovable property in Article 5.
U.S. real property may therefore be taxed in the United States. Germany does not necessarily lose its taxing right where German tax liability also exists. Instead, Article 11 generally coordinates the resulting double taxation through the treaty's credit mechanism.
- Article 4: treaty residence
- Article 5: immovable property
- United States may tax as the situs country
- Germany can also tax under German domestic law
- Article 11: relief from double taxation
Ownership structure
Direct ownership and entity ownership are not the same
For treaty and German inheritance tax purposes, it matters what is actually transferred. If the decedent owns the property directly, the asset differs from an interest in an LLC, partnership or corporation that itself owns the real estate.
Property held directly
Where the real estate is owned directly, Article 5 is generally the central treaty provision for allocating taxing rights.
Property held through a U.S. LLC
For an LLC, the entity must first be classified from a German perspective and the actual transferred asset must be identified.
Partnership structure
For partnerships, Article 8 and the attribution of underlying real estate can also become relevant.
An LLC does not automatically turn the property into “other property”
Where U.S. real estate is held through an LLC or partnership, the U.S. tax classification alone is not controlling for German purposes. In particular, a U.S. election treating an LLC as a disregarded entity does not automatically determine the German classification.
The entity, ownership rights and underlying assets must therefore be classified before applying the treaty.
Valuation
German inheritance tax applies German valuation law
The property value reported on a U.S. estate tax return, used in probate or stated in a U.S. appraisal is not automatically the value for German inheritance or gift tax purposes.
For German purposes, the fair market value must be determined under German inheritance-tax valuation rules. A qualified U.S. appraisal can be important evidence but must still be reviewed against German requirements.
For an inheritance, the relevant valuation date is generally the date of death. For a gift, the relevant date is generally the date on which the transfer is completed.
Valuation documents
Typical documents used for German valuation
Appraisal
An appraisal of the property's fair market value at the date of death or gift.
Purchase Documents
Purchase agreement, closing statement and evidence of significant subsequent improvements.
Property Tax Records
Local tax assessments can provide additional information but do not necessarily replace a tax valuation.
Rental Information
For rental property, leases, rental income, expenses and property-specific data can be relevant.
Mortgage & liabilities
A mortgage can reduce the German taxable net acquisition
If the U.S. property is subject to a mortgage, the analysis must consider both the gross property value and the associated liability. Estate liabilities can reduce the taxable acquisition under Section 10 ErbStG.
Relevant factors include who is legally liable for the debt, the outstanding amount at the relevant date and the economic connection between the debt and the inherited property.
Property value
The tax value of the property is first determined under German valuation law.
Liability
A qualifying mortgage or other debt is not simply netted against the property value but is separately reviewed under the German rules for estate liabilities.
Article 11 Treaty
U.S. estate tax can be credited against German inheritance tax
If the U.S. property is subject to both U.S. estate tax and German inheritance tax, Article 11 is central to preventing double taxation.
For U.S. immovable property that the United States may tax under Article 5, Germany can, subject to the requirements of Article 11, credit qualifying U.S. tax attributable to that property against German inheritance tax.
The credit is asset-specific and is generally limited to the portion of German tax attributable to the relevant foreign property.
Federal & State Taxes
The type of U.S. tax also matters
Federal Estate Tax
Federal estate tax is a tax expressly covered by the treaty and is the typical starting point for a credit under Article 11.
State Estate Tax
Certain taxes imposed by U.S. states can also become relevant for the German credit under the special rules of Article 11.
U.S. Income Tax
Income tax, for example on later rental income or a sale, is a different tax and is not creditable against German inheritance tax merely because the property was inherited.
Lifetime gifts
A gift raises similar issues, but with a different valuation date
A lifetime transfer of U.S. real estate can also trigger German gift tax where the donor or recipient is subject to unlimited German tax liability.
The United States can also impose gift tax because the property is located in the United States. Articles 5 and 11 of the estate-and-gift-tax treaty are therefore relevant to gifts as well.
Direct Gift
The property is transferred directly to a child, spouse or another recipient.
Partial Transfer
A fractional interest in real estate can itself constitute a taxable gift and must be valued separately.
Entity Structure
If an LLC, partnership or corporation interest is transferred rather than the property itself, the transferred asset must first be classified.
German allowances
German personal allowances can also apply to U.S. real estate
Where unlimited German tax liability applies, the personal allowance depends on the relationship between the decedent or donor and the recipient. The allowance is generally EUR 500,000 for spouses and registered partners, EUR 400,000 for children and EUR 200,000 for grandchildren.
The allowance does not apply only to the U.S. property. It applies to the taxable transfers between the same parties within the relevant ten-year period.
After the transfer
Inheritance or gift tax is only the first tax layer
After the property has transferred, additional German and U.S. tax issues commonly arise. These must be separated from the inheritance or gift tax analysis.
Rental Income
Ongoing rental income can be subject to both U.S. income tax and German income tax, with the income tax treaty coordinating the two systems.
Sale
A later sale can create income-tax consequences in both countries. Tax basis and acquisition date must be determined separately under U.S. and German law.
Later Transfer
If the property is later gifted or inherited again, a new and separate estate-and-gift-tax event arises.
Typical scenarios
When U.S. real estate becomes particularly relevant for German tax
German heir inherits a house in Florida
Germany can tax because of the heir's German residence. The United States may tax the property as the situs country. Article 11 coordinates the double taxation.
U.S. citizen in Germany gifts a U.S. home
German gift tax can arise because of German residence. U.S. gift tax and the treaty rules must also be reviewed.
German owner lives in Germany
Even without U.S. citizenship, directly held U.S. real estate can be relevant for U.S. estate or gift tax.
Property is held through an LLC
The first question is whether the real estate itself or an entity interest is transferred and how Germany classifies the LLC.
Documentation
Documents typically required
Ownership Documents
Deed, title records and, where applicable, LLC or partnership documentation showing the ownership structure.
Appraisal
Valuation of the real estate at the date of death or at the date of the gift.
Mortgage Statement
Evidence of the outstanding loan amount and legal liability at the relevant date.
Estate & Gift Tax Returns
Form 706, Form 709 or other U.S. tax documents where applicable or available.
State Tax Documents
Documentation regarding any state estate or inheritance tax.
Residence Information
Residence, habitual abode, citizenship and, where relevant, U.S. domicile of the parties.
Common mistakes
Issues frequently mishandled with U.S. real estate
“The property is in the U.S., so Germany cannot tax it”
Where unlimited German tax liability applies, Germany generally includes foreign real estate in the taxable acquisition.
Reviewing only U.S. estate tax
German residence of the decedent, donor or recipient can independently trigger German inheritance or gift tax.
Treating an LLC and the property as identical
With entity ownership, the transferred asset and the German classification of the entity must first be determined.
Using the U.S. appraisal without review
German valuation is governed by German valuation law.
Ignoring the mortgage
Liabilities connected with the property can affect the German taxable net acquisition.
Crediting all U.S. taxes automatically
The tax type, the relevant property and the credit limitation under Article 11 must be reviewed.
Further guidance
Related topics
Frequently asked questions
U.S. real estate, inheritance and gifts
Do I have to pay German inheritance tax on a property inherited in the United States?
Which treaty article applies to U.S. real estate?
Can U.S. estate tax be credited against German inheritance tax?
What happens if the property is subject to a mortgage?
Can a gift of U.S. real estate trigger German gift tax?
Can the United States tax real estate owned by someone who is not a U.S. citizen?
What if the property is held through a U.S. LLC?
Is the U.S. fair market value automatically the German tax value?
Germany–U.S. tax advice
Are you inheriting or gifting real estate in the United States?
We review German inheritance or gift tax liability, valuation, mortgages and other liabilities, asset allocation under Article 5 of the treaty and the credit of U.S. estate, gift and, where relevant, state taxes.
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