Property can be purchased and rented and sold in different ways. The type of acquisition plays a decisive tax role. For us, it is an opportunity to show what these differences are and what tax consequences result from rental and sale. For this purpose, we analyze real estate taxation in comparison with private acquisition and rental as well as with a real estate GmbH and a family foundation in Germany.

1. Property Taxation in Comparison – Introduction

Real estate is one of the most popular asset classes. They are both of high value and relatively stable in value. In our urbanized world, plots and buildings are also practically their basis. Logically, this is because real estate has a very high utility value for us humans. We live in it and work there – yes, we spend most of our lives under roofs. Nevertheless, real estate is so familiar to us by habit that we hardly notice its importance anymore. Only those who have ever experienced a strong earthquake in a city and have fled from a swaying house before it, also know a generally foreign view of real estate.

However, we want to focus on a different influence, rather a juxtaposition. So we plan to check when which property taxation is the cheapest in comparison. To this end, we compare the taxation of real estate, which we hold in private assets on the one hand, but also in an independent real estate GmbH on the other hand. As a third option, we also include a German family foundation in our comparison. Which variant will probably be the most attractive for tax purposes?

2. Real estate taxation in comparison: private assets with real estate

The acquisition of real estate as a private person has both advantages and disadvantages. One of the advantages is that the sale is completely tax-free under certain conditions. On the one hand, this applies if you use the property for your own residential purposes. Thus § 23 (1) sentence 1 number 1 EStG stipulates that the tax exemption occurs if you have lived there since the purchase of the property. Alternatively, this is also true if you have made a private use for residential purposes in the last three years before the sale. However, this is not a period of 36 months, but that one was resident in it for three consecutive years with different dates.

The last advantage here is the speculative period of ten years. Even if you can not prove your own use of the property in any of these years, their sale is tax-free. This makes the regulation also attractive for landlords of real estate.

Speaking of rental, when comparing real estate taxation, renting out real estate is also a potentially significant disadvantage. Because the rental income is subject to the personal tax rate of the landlord. If the income is considerable, the taxes are correspondingly high. Although the depreciation of the acquisition costs can often create a noticeable counterweight in the advertising costs. In addition, financing costs are also eligible. These too can be important. But if you already have considerable income through other incomes apart from real estate rental, rental income is also affected by a high tax rate.

After all, if losses result from the rental of the property, you can offset them with various other income. The fact that the rental causes a tax loss is anything but unlikely. Because if a high depreciation is given, this can lead to losses at the private level. But that does not mean a deficit, because the depreciation has no influence on the income.

3. Real estate taxation in comparison: Immobilien-GmbH

So if renting real estate on a private level is sometimes accompanied by high taxes, what about a real estate GmbH? After all, this is a legal entity, i.e. a corporation. As such, Immobilien-GmbH is subject to corporate tax instead of income tax. Then there is trade tax. So at a GmbH we are basically dealing with two taxes instead of only one. Is that worth it anyway?

And how! Because unlike the progressive income tax with its increasing tax rate with income, the corporate tax is blessed with a flat rate of currently 15%. This is already much cheaper than the income tax in most cases may ever be. In addition, the corporate tax rate is expected to fall continuously to 10% over the next few years.

It therefore remains to be estimated how the trade tax affects the real estate taxation of Immobilien-GmbH in comparison. Surprise: under certain circumstances it is eliminated. Yes, because § 9 no. 1 sentence 2 GewStG keeps the option to reduce the trade tax open on request. Therefore, this option is also called extended land shortening. However, certain conditions must be met. For example, Immobilien-GmbH must limit itself to the mere management of real estate. Any associated commercial activity is a ground for exclusion for the application of the extended land reduction. This concerns, for example, the rental of movable assets, for example an escalator, and the provision of services, such as a caretaker service. The only exception to this is the supply of certain amounts of electricity from a photovoltaic system installed on the property.

But there is also a disadvantage that you take with a real estate GmbH. Thus, the sale of the property is always subject to corporate tax.

For this, there is at least the possibility of offsetting losses from the rental of one property with profits from the rental of another. The losses could also be offset against other commercial income, but then the extended land reduction would be excluded.

4. Real estate taxation in comparison: Family foundation with real estate

The Family Foundation is the conclusion of our analysis. As an independent asset, a foundation is a legal entity and belongs to corporations. Consequently, they are regularly taxed under corporate and business tax. This means that she too, similar to a GmbH, can make use of the extended property reduction. The real estate taxation of the family foundation is very similar compared to that of Immobilien-GmbH – at least when considering the taxation of rental income. This therefore also includes the restrictions to which the family foundation is exposed if it wants to compensate losses internally. Because here too, if a foundation wants to use the extended land shortening, it must refrain from commercial activity.

If, however, real estate taxation after a sale of real estate is included in the considerations, there are again differences compared to Immobilien-GmbH. Because a foundation is not a corporation, is therefore not subject to blanket equal treatment with Immobilien-GmbH. This means that she can make her profits from the sale of her real estate according to the provisions of the Income Tax Act. The logical consequence of this is that the family foundation can also make a tax-free sale of real estate.

5. Real Estate Taxation in Comparison – Conclusion

Property taxation: Advantages and disadvantages in comparison

So we come to the final comparison of real estate taxation at a family foundation as opposed to that at a real estate GmbH and on a private level. Both the taxation of current rental income and the profits from a subsequent real estate sale are advantageous with a family foundation. It thus has the freedom to benefit from the advantages of real estate taxation on a private level as well as that of a Immobilien-GmbH. However, a family foundation in Germany is subject to the so-called inheritance tax every 30 years. It means that the tax office carries out an inheritance tax on the fabricated asset of the foundation. Starts because a foundation, of course, neither knows heirs nor is mortal.

Furthermore, a tax-free sale by a Immobilien-GmbH can take place. You use the opportunity to form a so-called § 6b reserve, which § 6b EStG opens up when you reinvest the profit. Of course, certain criteria must be observed for this. However, since there can be no total tax-free sale with a real estate GmbH in the end, this option is more interesting for asset building.

However, a real estate GmbH is still a tempting alternative when it comes to renting properties, where at best a small profit results from a possible sale, but the current rental income is particularly high. But even here, the family foundation can keep up. On the other hand, the establishment of a real estate GmbH is much easier than the establishment of a foundation. Only the private purchase of real estate is even easier than with a GmbH.

But if rental income should be rather meager, but the increase in value looks very promising, the private acquisition is quite a worthwhile choice. Because in this context, further design options open up. For example, the spouse swing can be used to use both the gradual increase in value and the financing by the spouse in a tax-optimizing manner.

5.2. How to Achieve the Optimum from Real Estate Taxation