If you want to buy real estate from private, there are opportunities right at the beginning to save taxes later. This already applies to the first own property. So you should already pay attention to the purchase contract that you record the value of the building and the land separately. The value of the building should be as high as possible, because only that can be written off later. In addition, you should also record all movable objects and each rental object in a multi-party house separately in terms of value. If you want to buy real estate in need of renovation from private, the renovation costs should be a maximum of 15% of the acquisition costs in the first three years. When renting and taxing, it should be remembered that all costs associated with the purchase can be relevant (for example, travel costs for visits, loan costs). After ten years, you can then sell the object tax-free. Also, several sales of this type do not constitute commercial real estate trade.

There are several ways to buy property. On the one hand, you can set up a partnership or a corporation for this purpose. On the other hand, you can also buy real estate from private. Each of these practices has its own tax and other benefits and constraints. So you should consider these right from the beginning when you deal with the idea of buying real estate from private. Because once you have taken one of these paths, then a later correction, for example by a contribution to a real estate GmbH, is always associated with effort, although in principle quite possible.

Here we focus on the question of what to look for when buying real estate from private. In four steps, we address selected aspects related to the purchase, rental and taxation of rental income as well as the subsequent sale.

If you want to buy real estate from private, then you should also deal with the purchase contract in detail for tax reasons. Because even here you can lay the foundation stone to save taxes later. But also in civil matters you can use some advantages even before concluding the purchase contract.

2.2.1. Distinction between buildings and land

Start by specifying the purchase price in the purchase contract. Usually, buyers and sellers negotiate a uniform price for a property. There is no distinction between the building on the one hand and the land on the other. But at the latest when drawing up the purchase contract you should take this distinction into account. Because in the later taxation of the property this is tax quite relevant. In depreciation, a distinction is made between buildings and land. The building is considered usable. So you can write it off. The property on which the building stands is by no means usable. Therefore, no depreciation can be made on the share of the purchase price that is attributable to the land.

So if you do not document a distinction between the share of the real estate purchase price in the purchase contract, the tax office can later intervene in the depreciation and set its own standards. To avoid this, you should therefore specify in the purchase contract how much you pay for the building and how much you pay for land. Because the prices negotiated between buyer and seller are usually decisive according to a judgment of the Bundesfinanzhof. However, these prices must also be objectively traceable.

The subsequent tax advantage in the context of depreciation is therefore that the building accounts for as large a part of the purchase price as possible. This allows you to set the share that you can write off as high as possible, so that you get the lowest possible taxable surplus when taxing rental income.

2.2.2. Consideration of objects in the purchase contract

Similar is also the second aspect that should be considered when designing the purchase contract. As a rule, you buy more than just a property.

If you want to buy real estate from private, then when visiting the property you will see more than just the pure house and the associated property. You may also see a fitted kitchen, an oven, a carport, an alarm system and many other items that belong to the sales object, but strictly speaking are independent items. Unlike the property, they are mobile, interchangeable and therefore also separately purchaseable. Of course, during the purchase negotiations, there is usually no separate negotiation about the purchase price of these objects. But also here you should pay attention to a separate price indication when drawing up the purchase contract. Because these movable objects are subject to a significantly shorter period of use than the building. You can also write them off much faster. If you want to replace them later with new items, then you will also incur new acquisition costs, which you can then write off separately.

2.2.3. Multi-party apartments in the purchase contract

If you want to buy real estate from private, where there are more than one apartment or other units, then the exact quantification of the value of the individual units in the purchase contract can also make sense. Because then, in the event of a subsequent sale of individual units, the corresponding valuations can be used directly in the calculation of the taxable profit. This also serves to prevent a possible later dispute with the tax office.

Another aspect that may help you if you want to buy real estate from private is related to concluding the purchase agreement. Usually, sellers and buyers come together at the notary to sign the purchase contract. But you can also avoid this by agreeing with the seller a powerless representation. More precisely, the seller then signs the purchase contract with his notary. Subsequently, you agree to this by signing with your notary. This sounds quite dubious, but is by no means legally unusual or even inadmissible. This is because due to this circumstance, the purchase contract is legally in limbo until you agree to it. And as I said, you can also do this at a later date and at a notary of your choice (for example in your hometown). You then confirm that the purchase contract signed by the seller is actually legally valid.

However, in the case of a debt financing, you have to pay attention to whether the notary, with whom you sign the purchase contract, insists that the order of the land debt should be made solely by him. This condition leads to the fact that you then have to appear with this notary anyway to order the land charge. For example, if the property and the notary are located in a place far away from you, then you have to travel there for this occasion, although otherwise you would rather give your consent to the purchase contract with your local notary. However, if such a restrictive clause of the local notary is missing, then you can also order the land charge by your notary.

One thing you should pay attention to before buying the property is the extent of upcoming renovations. This may be particularly relevant for listed properties. If there are many defects that you want to repair after the purchase, you should consider a tax special feature. In the first three years, costs for renovation, renovation and similar expenses above a certain level can lead to the tax office classifying these costs as subsequent acquisition costs. This happens if, within these first three years, the sum of these costs exceeds 15% of the initial acquisition costs. The net amounts of the invoices shall apply.

Normally, the cost of such work can be set as advertising costs in the tax return and offset directly with the rental income. This can sometimes significantly reduce the tax. In some cases, this can even lead to a carry-forward loss being obtained, which can then be applied in a tax-reducing manner in later assessment periods. However, if these costs become subsequent acquisition costs in the first three years after the acquisition, this leads to them being written off together with the original acquisition costs over the entire period of use – usually 50 years.

Therefore, the obvious idea at this point is to initially only carry out the most important works and keep the costs below 15% of the acquisition costs. The remaining work will then be carried out after this deadline. Ideally, these can then be set directly as advertising costs and thus positively influence taxes.

4.2.1. Mandatory filing of an income tax return at rental

In doing so, we have drawn the line for taxing the income from the rental of the property. It should first be noted that this circumstance in any case requires the regular submission of an income tax return. Finally, tax offices can expect those who buy real estate from private companies to disclose their income in order to tax their income. In contrast to the treatment of payroll taxable services, where ideally the tax office is informed about the income of taxpayers, tax offices have no information for other types of income on which they could carry out taxation.

It is now important that you record all expenses and all income associated with the rental in Annex V to the income tax return. In addition to the rental income, this also includes the incidental costs received, which are also regularly received. Because levies and other additional income, which one receives in addition to the rent, also count as income. Of course, they are offset against the expenses that are also to be documented and associated with them.

4.2.2. Allocation of year-to-year payments

You also have to make a distinction between regularly received amounts that flow over the turn of the year. A period of 10 days shall be considered as a transitional period within which such payments may be allocated to another year. For example, if you receive the rent for the previous December on January 10, 2022, then this payment is considered to belong to the assessment period 2021. However, this payment will not be made until 11. January 2022, then you have to set this amount for the income tax for the year 2022. Conversely, this also applies to advance payments already made in December. So who is renting for January 2022 already on the 20th? 1 December 2021, it must also already be recorded in the income tax return 2021. However, if this payment is made only on 22 December, then this amount is set in the income tax return for 2022.

4.2.3. Depreciation vs. Advertising costs

4.2.3.1. Depreciation

In addition, you should make sure that expenses associated with the purchase of the property are also tax-relevant. In addition to the usual notary costs, this also includes the already mentioned and as far as possible avoidable subsequent acquisition costs. There are also other costs, but they are often rarely considered. Because also the costs that go along with the search and the negotiations, if you want to buy real estate from private, can be set here. This includes, among other things, travel costs for visiting a distant property or costs for an appraisal by an architect. However, these costs should be considered as part of the acquisition costs. The tax office therefore takes them into account only in the context of depreciation. For this purpose, the costs, if they are related to both the building and the land, must be divided according to their value ratios or allocated separately.

4.2.3.2. Advertising costs

In contrast to these depreciable expenses, there may also be ongoing costs, which are specified as advertising costs in the income tax return. These can be incurred, for example, for general electricity, waste disposal, heating maintenance, repairs or the service of a chimney sweep. But also the renewal of objects that were purchased together with the property, are included. This brings us back to the previously mentioned separate value determination of these items in the purchase contract. Because if you have written off these items after the purchase, you can write off the cost of their replacement again. In this way, you can keep the rental property in good condition and at the same time have the costs refunded via the tax. But also potentially incurred costs for a debt financing (exclusive repayment) are deductible as advertising costs.

4.2.3.3. Distinction between depreciation and advertising costs

The distinction between depreciation and advertising costs depends on whether the expenses are related to the acquisition. If this is the case, then these expenses are added to the acquisition costs. Otherwise, they are immediately deductible advertising costs. The only exceptions here are those expenses, which are considered by law as subsequent acquisition costs or which have to be written off over their own multi-year period of use.

The last chapter on our agenda deals with the tax-free sale of the property. And this consideration also requires attention at the time of acquisition. Because the tax-free sale of real estate in private ownership is only possible under certain conditions.

If you buy real estate from private, you have to be prepared for the fact that the tax-free sale will only be possible one day from a holding period of ten years. This is regulated in § 23 (1) sentence 1 number 1 EStG. If you want to sell earlier, there are taxes on the profit. So if it is foreseeable that the sales proceeds are higher than the acquisition costs, then you should still be patient with the sale. However, if one expects a loss, then the sale before the deadline may appear tax-advantageous. Because then you can offset the occurring loss with future profits.

On the other hand, there are exceptional conditions under which a tax-free sale is also possible before the expiration of the ten-year speculative period. This applies if you used the property for your own residential purposes in the year of sale as well as in the two previous years. In addition, the tax-free sale also applies if you used the property exclusively for your own residential purposes since the acquisition. By the way, this also includes all properties that you used occasionally, so also holiday apartments or holiday homes. And properties that used their own children also benefit from these exceptions.

We would also like to address one last point, because it employs many of our clients who intend to buy real estate from private. Because if you own and rent several properties in private assets and want to sell them later, then the question arises whether this is possibly a commercial activity. If this is actually the case, then the tax-free sale would be excluded. However, we can reassurely point out that commercial real estate trading only exists when the acquisition of real estate leads to a sale in rapid succession and the intention to generate profit in this way is visible. However, if you want to buy real estate from private and sell it only after the ten-year speculative period has expired, you can confidently do so with any number of real estate without this having a commercial character.