German Tax Law · Real Estate
Private Real-Estate Sales Under Section 23 EStG
When privately held real estate is sold, German tax law requires an analysis of whether the transaction constitutes a taxable private disposal under Section 23 EStG. Key issues include the ten-year period, the owner-occupancy exception, the relevant acquisition and disposal dates, and the calculation of the taxable gain.
General Rule
Private Property Sales Can Be Taxable Within Ten Years
Section 23 EStG applies to disposals of real estate and rights that are treated like real estate under German civil law if the period between acquisition and disposal does not exceed ten years.
The provision generally applies to assets held as private property. If the property belongs to a business or the activity constitutes commercial property dealing, different rules apply.
Whether a sale is actually taxable also depends on whether one of the statutory exemptions — especially the owner-occupancy exception — applies.
Ten-Year Period
Acquisition and Disposal Dates Are Decisive
Acquisition
The relevant date is generally the date on which the binding contractual agreement for the purchase is concluded.
Disposal
For the sale, the decisive date is likewise generally the conclusion of the binding contractual disposal agreement.
Not the Land-Register Date
The later transfer of legal title in the land register is generally not the controlling date for purposes of the ten-year period.
Practical Point
The Ten-Year Period Is Often Calculated Incorrectly
In German real-estate transactions, the notarized contract, purchase-price payment, transfer of possession and land-register transfer often occur on different dates. For Section 23 EStG, the exact date of the binding acquisition and disposal agreements therefore matters.
Where the ten-year period is close to expiring, a difference of only a few days can determine whether the sale is taxable or tax-free.
- retain the purchase agreement
- review the sales agreement
- document the contract dates
- do not rely only on the land-register date
- review options and preliminary agreements separately
- calculate the period before signing in borderline cases
Owner-Occupancy Exception
Owner-Occupied Property Can Be Sold Tax-Free Even Within Ten Years
Section 23 EStG excludes certain property sales from taxation where the property was used for the taxpayer's own residential purposes.
An exemption can apply where the property was used exclusively for the taxpayer's own residential purposes between acquisition or completion and disposal, or where it was used for the taxpayer's own residential purposes in the year of disposal and in the two preceding calendar years.
The second alternative does not necessarily require three full years of continuous occupancy. What matters is use in three affected calendar years.
What Qualifies as Own Residential Use?
The Property Must Actually Serve the Taxpayer's Own Residential Purposes
Main Residence
Use as the taxpayer's principal home typically satisfies the own-use requirement.
Second Home
A genuinely self-used second home can also generally qualify as use for the taxpayer's own residential purposes.
Children
Rent-free use by a child who is taken into account for German income-tax purposes can, under certain conditions, be treated as own residential use.
Rental
Rental to a third party for consideration generally does not qualify as own use and can prevent or limit the exemption.
Gain Calculation
The Taxable Amount Is the Gain — Not the Sales Price
The taxable gain is generally the sales proceeds less acquisition or construction cost and less expenses directly connected with the disposal.
A particularly important point for previously rented property is that depreciation already claimed for tax purposes can reduce the acquisition or construction cost used for the Section 23 EStG gain calculation. The taxable gain can therefore exceed the simple difference between original purchase price and sale price.
- sales proceeds
- less acquisition cost
- less acquisition-related expenses
- plus relevant subsequent construction costs
- take prior depreciation into account
- deduct disposal costs
- retain complete supporting documentation
Typical Cost Items
Which Items Can Affect the Gain Calculation?
Acquisition-Related Costs
German real-estate transfer tax, notary and land-register fees, and certain brokerage costs can form part of acquisition cost.
Construction Costs
Subsequent building work and substantial improvements can increase the relevant tax basis.
Selling Expenses
Brokerage commissions, certain legal and advisory costs, and other expenses directly connected with the sale can be relevant.
Depreciation
For previously rented property, it is necessary to determine the extent to which depreciation has reduced the acquisition or construction cost relevant under Section 23 EStG.
Special Cases
Inheritance, Gifts and Other Transfers
Inheritance
For gratuitous acquisitions, Section 23 EStG generally looks back to the acquisition by the predecessor in title. The predecessor's holding period is therefore generally taken into account.
Gift
In the case of a gift, the recipient likewise generally succeeds to the predecessor's position for purposes of the holding period.
Partly Gratuitous Transfer
Mixed gifts or transfers involving assumption of liabilities can require a division into paid and gratuitous components.
Transfers Between Spouses
The nature of the acquisition, any consideration and succession to the predecessor's position must also be analyzed separately for later Section 23 EStG purposes.
Distinction
Multiple Sales Can Lead to Commercial Property Dealing
Section 23 EStG applies to private disposals. If properties are acquired, developed or sold as part of a sustained activity aimed at repeated disposals, the activity can instead constitute commercial property dealing.
The well-known three-property threshold is an important indicator, but it is not a rigid statutory tax-free limit.
If commercial property dealing exists, Section 23 EStG no longer governs the sale; in particular, the ten-year period no longer operates as a private-property holding-period rule.
Cross-Border
Section 23 EStG Can Also Be Relevant to Foreign Real Estate
If a taxpayer is subject to unlimited German income-tax liability, Section 23 EStG can in principle also apply to privately held real estate located outside Germany. Whether Germany may ultimately tax the gain depends additionally on the applicable double-tax treaty.
For U.S. real estate, the Germany–U.S. tax treaty generally allocates taxing rights to the situs state, the United States. For directly held U.S. real estate of a German resident, Germany generally applies the exemption method, potentially with a progression effect.
Related Guidance
Related Topics
Frequently Asked Questions
Private Real-Estate Sales Under Section 23 EStG
When is a private real-estate sale taxable in Germany?
When does the ten-year period begin?
Do I have to live in the property for three full years?
What happens to depreciation already claimed?
Does inheritance start a new ten-year period?
Does Section 23 EStG still apply if I sell several properties?
German Real-Estate Tax Advice
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We review the ten-year period, owner occupancy, acquisition and disposal dates, depreciation effects, gain calculation and the distinction from commercial property dealing.
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