German Tax Perspective · Typical Case
U.S. Person Renting German Real Estate
If a U.S. person rents out real estate located in Germany, Germany generally has the taxing right as the situs state. The German rental-income calculation is made under Section 21 EStG using German rules for deductible expenses and depreciation. Continuing U.S. taxation is then typically coordinated on the U.S. side through foreign tax credits.
Situs State
Germany Taxes Income From German Real Estate
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 German rental property, Germany therefore generally has the taxing right.
The German tax calculation follows German rules. In particular, Section 21 EStG, German deductible-expense rules and German depreciation are controlling.
German Tax Liability
Whether the U.S. Person Lives in Germany Changes the Tax Framework
Residence in Germany
If the taxpayer has a German residence or habitual abode, unlimited German income-tax liability generally applies. The German property is then part of the taxpayer's general German tax return.
Residence Only in the United States
Without German residence, German-source rental income can still create limited German income-tax liability. The rental activity therefore remains taxable in Germany.
German Rental Income
Germany Taxes the Net Result Under German Tax Law
For German purposes, the U.S. net rental income amount is not controlling. The income is calculated under German rules as the surplus of rental income over deductible expenses.
Relevant items include actual rental income, financing costs, property tax, insurance, management costs, maintenance and German depreciation.
- record rental income
- determine deductible expenses under German law
- allocate loan interest economically
- do not deduct principal repayment as rental expense
- calculate depreciation separately under German law
- distinguish repairs from capital expenditure
German Income Calculation
Typical Cost Items for German Rental Property
Financing
Loan interest can generally be deductible where the borrowing is economically attributable to the rented property.
Property Tax & Insurance
Property-related recurring costs can generally be taken into account in the German rental-income calculation.
Repairs
Maintenance expenses can often be deductible immediately, while construction or improvement costs may have to be capitalized and recovered through depreciation.
Management
Property-management fees, certain legal and advisory costs and other rental-related expenses can be relevant deductible expenses.
German Depreciation
German Building Depreciation Must Be Calculated Separately
For German rental property, the portion of acquisition or construction cost attributable to the building is depreciated under Section 7 EStG. Land itself is not depreciable.
The allocation between building and land, acquisition-related costs and later construction or improvement costs directly affect the German depreciation basis.
Any depreciation used in the U.S. tax return is not controlling for the German calculation.
Renting to Relatives & Below-Market Rent
German Section 21 EStG Rules Also Apply to U.S. Persons
If the property is rented to relatives or below local market rent, the German reduced-rent rules apply.
In particular, the 50% and 66% thresholds can determine whether deductible expenses remain fully deductible or have to be apportioned.
U.S. Tax Side
The U.S. Person Generally Remains Subject to U.S. Worldwide Taxation
A U.S. citizen or other U.S. taxpayer generally also reports German rental income on the U.S. tax return. Because Germany taxes the property as the situs state, double taxation is typically coordinated on the U.S. side through foreign tax credits.
The U.S. calculation uses its own rules for depreciation, basis, expenses and currency conversion. The German and U.S. rental results therefore often do not match.
- U.S. worldwide taxation
- foreign rental income
- separate U.S. depreciation
- Form 1116 / foreign tax credit
- U.S. basis and currency rules
- possible state tax
Foreign Tax Credit
German Tax Is Central to the U.S. Coordination
Because Germany has the primary taxing right over the German property, the German income tax attributable to the rental activity is an important factor in the U.S. foreign-tax-credit calculation.
The credit is nevertheless determined under U.S. rules and does not automatically equal the full amount of German tax. Income category, foreign tax credit limitation and timing can create differences.
The U.S. tax treatment is covered in detail on taxrep.us.
Later Sale
Germany Can Also Have the Primary Taxing Right on a Later Sale
On a later sale, the first question is whether a taxable gain arises under German law — for privately held property, especially under Section 23 EStG.
A sale that is tax-free in Germany, for example after the ten-year period, is not automatically tax-free in the United States for a U.S. person. This is an important cross-border mismatch.
Ownership Structure
Direct Ownership, a GmbH or Other Entities Change the Analysis
If the German property is held through a GmbH, partnership or another entity rather than directly, both the German rental-income calculation and the U.S. tax consequences change.
For a German corporation, additional U.S. information-reporting and CFC issues can arise for the U.S. person. The structure should therefore be reviewed on both sides before acquisition or restructuring.
Documents Needed
Which Documents Should Be Available for the German Return?
Acquisition
Purchase agreement, notarial documents, real-estate transfer tax, allocation of purchase price between building and land, and acquisition-related costs.
Rental Activity
Lease agreement, rental receipts, service-charge statements and property-management documentation.
Costs
Loan interest, property tax, insurance, repairs, management expenses and other deductible rental costs.
Depreciation History
Acquisition/construction cost, building allocation, later investments and prior German depreciation.
Related Guidance
Related Topics
Frequently Asked Questions
U.S. Person With German Rental Property
Where is rental income from German real estate taxed?
How is rental income calculated in Germany?
Can I use U.S. depreciation in Germany?
How is double taxation avoided?
What happens if a later sale is tax-free in Germany?
What changes if the property is held through a GmbH?
Germany–U.S. Tax Advice
Are You a U.S. Person Renting Out Real Estate in Germany?
We prepare the German rental-income calculation under Section 21 EStG, review deductible expenses and depreciation, determine the German tax burden and coordinate the German treatment with the U.S. foreign-tax-credit framework.
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