German Tax Law · Real Estate
Rental Income and Leasing Under Section 21 EStG
Income from renting apartments, houses and other real estate is generally taxed in Germany under Section 21 EStG. The relevant amount is not gross rent, but the surplus of rental income over deductible expenses.
Basic System
Germany Taxes the Net Rental Result
Section 21 EStG covers in particular income from the rental and leasing of land, buildings and parts of buildings. For privately held real estate, the taxable amount is generally determined as the surplus of rental income over deductible expenses.
A property can therefore generate positive cash flow while producing a much lower taxable surplus, or even a tax loss, because of interest expense, depreciation and major maintenance costs.
Framework
Three Levels Determine the Tax Result
Rental Income
Base rent, recoverable service charges and other payments connected with the use of the property must be recorded.
Deductible Expenses
Expenses incurred to acquire, secure and preserve rental income can generally be deductible.
Depreciation
The depreciable building portion is allocated over its tax life. Land itself is not depreciable.
Income
Which Payments Count as Rental Income?
Base Rent
The agreed net rent is generally the core item of income from rental and leasing activity.
Service-Charge Advances
Advance payments and recoverable charges paid by the tenant are generally taxable income; the corresponding costs can appear on the expense side.
Additional Payments
Additional amounts arising from annual service-charge settlements are generally taken into account when received for tax purposes.
Other Tenant Payments
Other payments by the tenant can also be taxable where they are economically connected with the grant of use.
Deductible Expenses
Expenses Are Deductible Where They Are Economically Connected With the Rental Activity
Deductible expenses are costs incurred to acquire, secure and preserve income. For rental property, financing costs, property charges, insurance, management fees and maintenance costs can be relevant.
The decisive factor is the economic connection with the rental activity. Private expenses or costs relating to owner-occupied parts of a property must be separated.
- loan interest
- property tax and public charges
- building insurance
- property management
- legal and tax advice connected with the rental activity
- travel expenses related to the property
- maintenance and repair costs
- depreciation on buildings and other depreciable assets
Financing
Interest Can Be Deductible — Principal Repayment Generally Is Not
Interest
Loan interest can generally be deductible where the borrowing is economically attributable to the rented property.
Principal
Repayment of loan principal is generally a balance-sheet or wealth transaction and not an immediately deductible rental expense.
Use of Loan Proceeds
For interest deductibility, the actual use of the borrowed funds is more important than the fact that a property serves as collateral.
Mixed Use
If borrowed funds are used partly for private purposes and partly for the rental activity, an allocation can be required.
Depreciation
Only the Building Portion Is Depreciable
For rented buildings, the portion of acquisition or construction cost attributable to the building is deducted over time through depreciation. Land does not wear out for tax purposes and is therefore not depreciable.
For many buildings completed after December 31, 2022, straight-line depreciation is generally 3% per year. Buildings completed before 2023 and after 1924 are commonly subject to a 2% rate, while buildings completed before 1925 are generally subject to a 2.5% rate.
The allocation of total purchase price between land and building is therefore a central element of the annual tax calculation.
Maintenance or Capital Expenditure?
Not Every Renovation Is Immediately Deductible
Maintenance Expense
Typical repairs and maintenance can generally be deducted immediately, provided no special capitalization rule applies.
Construction Costs
Costs for construction, extensions or substantial improvements can have to be capitalized and deducted only through depreciation.
Near-Acquisition Construction Costs
Significant repair and modernization work carried out shortly after acquisition can, where the requirements of Section 6(1) no. 1a EStG are met, be treated as acquisition-related construction costs.
Case-by-Case Review
For major renovation projects, the tax classification should ideally be planned and documented before the work is completed.
Reduced Rent
50% and 66% of Market Rent Are Important Thresholds
Special rules apply where residential property is rented below the local market rent.
If the agreed rent is less than 50% of the local market rent, the letting is generally divided into a paid and an unpaid portion. Where a residential letting is intended to be long-term and the rent is at least 66% of market rent, the letting is generally treated as fully paid.
In the range from 50% to below 66%, a total-surplus forecast is generally relevant. If the forecast is positive, full expense deduction can generally be preserved; if the result is negative, expenses may need to be apportioned.
- below 50%: split into paid and unpaid portions
- 50% to below 66%: review total-surplus forecast
- 66% or more: long-term residential letting generally treated as fully paid
- determine local market rent correctly
- include service charges in the comparison
- especially relevant for rentals to relatives
Vacancy
Expenses Can Remain Deductible During a Vacancy
If a property is temporarily vacant, expenses can continue to be connected with the rental activity where a serious intention to generate rental income still exists.
The actual facts matter: rental advertisements, engagement of a broker, a market-based asking rent, renovation work aimed at re-letting and other objective evidence can support the continuing rental intention.
Relatives
Rental Agreements With Relatives Must Be Implemented in Practice
Rental arrangements between parents and children, spouses or other relatives can be recognized for German tax purposes. The agreement must be genuine, legally effective and actually carried out as agreed.
Written Agreement
Rent, service charges, payment dates and use of the property should be clearly agreed and documented.
Actual Payment
Rent should be paid regularly in accordance with the agreement rather than merely recorded as an accounting entry.
Service Charges
The service-charge arrangement should also be implemented in practice and match the written contract.
Reduced Rent
Where rent is below market level, the special thresholds under Section 21(2) EStG must also be reviewed.
Classification
Long-Term Rental Is Generally Private Asset Management
The long-term rental of privately owned real estate is typically treated as private asset management and produces income under Section 21 EStG. Additional services, hotel-like short-term letting or a broader commercial organization can, however, lead to a different category of income.
A later sale also requires a distinction between private asset management and commercial property dealing.
Foreign Real Estate
Foreign Property Requires Both German Tax Law and Treaty Analysis
If a taxpayer is subject to unlimited German income-tax liability, a German income amount must first be determined even for foreign real estate. Whether Germany ultimately taxes that amount or exempts it under a double-tax treaty is a second question.
For U.S. real estate owned by a German resident, the United States may generally tax the rental income as the situs state. For directly held U.S. real estate, Germany generally applies the treaty exemption method, although the amount calculated under German rules can remain relevant for progression.
Related Guidance
Related Topics
Frequently Asked Questions
Rental Income and Leasing Under Section 21 EStG
Which income falls under Section 21 EStG?
Is loan interest on rental property deductible?
Can I depreciate the entire purchase price?
What happens if I rent below market value?
Are expenses deductible while the property is vacant?
How is U.S. rental property treated in Germany?
German Real-Estate Tax Advice
Do You Rent Out Real Estate?
We review rental income, deductible expenses, financing, depreciation, renovation costs, reduced-rent arrangements and the German tax treatment of domestic and cross-border real-estate situations.
Schedule an Initial Consultation