Fix and flip refers to a certain strategy to invest in real estate. The focus is on the acquisition of objects in need of rehabilitation, their subsequent upgrading and immediate resale. The difference between the acquisition and restructuring costs on the one hand and the sale price on the other hand is the profit, which is taxed differently depending on the legal form. Only in rare cases is the sale tax-free.

1. What’s behind Fix and Flip Real Estate?

The “fix and flip” concept takes advantage of the need for renovation and the associated loss of value of real estate. The first step is to find suitable objects in a good location, for example in city centers or in the immediate vicinity of larger metropolises. Rural regions with good transport connections are also interesting for fix and flip, as the value of the property itself regularly exceeds the land value here.

In the second step, the object is renovated. For example, an empty city villa creates two rental properties or condominiums. In addition to the condition of the property, the amount of the necessary investment also depends on the own contribution. For a general renovation in 2023, costs of about EUR 400 to EUR 600 per square meter are to be expected.

The third step is the sale of the renovated property, either as a whole or divided into individual objects. The aim is to achieve the highest possible purchase price, which generates a profit over and above the invested capital.

Which taxes apply to Fix and Flip depends on several factors. First and foremost, the legal form of the investing company plays a role. So it makes a difference whether an investor as a private person, commercial real estate dealer or corporation makes investments. The concrete use of the property is also important, as the legislature distinguishes between residential and commercial use in certain cases.

Fix and flip as a private person: When does § 23 EStG apply?

Very few real estate investors start in the legal form of a corporation – because, for example, a real estate GmbH can also have considerable disadvantages. Therefore, the first fix and flip investments take place regularly in private assets and only include a small volume, such as the acquisition of a single condominium on the edge of a larger German city.

§ 23 EStG applies to private individuals, which finally regulates so-called private sale business. Other income within the meaning of the standard is available if purchase and sale take place within a period of 10 years, with the respective notary contracts being decisive. If the sale takes place within 10 years of the purchase of the property, the resulting profit is subject to regular income tax. Thus, up to 50% tax is incurred, the profit being determined according to the following formula:

Profit from § 23 EStG = Sale Price – Ancillary costs of sale – Acquisition and production costs (renovation expenses belong to this; § 6 (1) no. 1a EStG) – Ancillary acquisition costs (notary, land register, etc.)

Within the 10-year period, real estate sales are tax-free only if they were used exclusively for own residential purposes (§ 23 (1) sentence 1 number 1 sentence 3 EStG). A use for own residential purposes also exists for holiday homes and apartments, provided no rental and only a usual vacancy took place (BFH, judgment of 27.06.2017, IX R 37/16).

For Fix and Flip, a possible strategy is therefore the acquisition, renovation, temporary use as a holiday apartment (about one year) and subsequent disposal. In this way, a tax-free sale can be realized if the boundaries of commercial real estate trading have not been exceeded.

3. Real estate transactions in the commercial sector: the real estate trade

Private asset management, which also includes Fix and Flip business in principle, must be distinguished from the so-called commercial real estate trade. According to the case law of the Bundesfinanzhof (BFH), such a taxpayer is