Real estate offers a whole range of ways to design taxes. The focus is often on depreciation. An even more significant factor is the potential tax-free sale out of private assets. If you want to use these setscrews for tax optimization, you have to proceed skillfully. It would be particularly tempting if you could sell real estate to yourself in order to exhaust the tax benefits both completely and recurrently. But is that even possible?

1. Sell real estate to yourself – Introduction

If someone told you that you can sell your car to yourself at a profit, then you would certainly hardly take it seriously. But we claim that you can sell real estate to yourself – with a tax-free profit! In addition, through the mere increase in value, we also claim another tax advantage, namely depreciation. They are usually particularly high in real estate and therefore interesting for us. Together with possible financing costs and other expenses for the preservation of the real estate, you can continuously generate tax losses. These losses can then be offset against other income in order to achieve tax-free income at another level. At least now you are probably wondering how this should work. Good that you ask us about it – we are happy to explain it to you.

2. Selling Property to Yourself: Purchasing and Renting

Let’s start our explanation with the first step, the purchase of the first property. For this acquisition, we use equity on the one hand, but also external capital in the form of a usual bank loan. This is, of course, interest-bearing, which nowadays is accompanied by an interest rate of about 3%. These costs can therefore be offset against rental income in taxation. Only the difference is taxable. In addition, other costs can be set, because usually smaller and larger repair and maintenance measures are always required. However, the largest item in advertising costs is usually depreciation on the cost of the property. This is usually 2% of the acquisition costs.

If we now assume a rental yield of 5%, it is easy to see that, after deducting the advertising costs described above, practically no taxable amounts remain. So the rental is already particularly advantageous for tax purposes. But the best part of the design is yet to come.

3. Improving the value of real estate

The rental income is actually only a small bonus that we can use to pay off the bank loan. The greatest return, on the other hand, can often be expected via the increase in value. However, income tax would then apply. But there is an exception in income tax law. Anyone who sells a property after a ten-year speculative period does not pay tax on it (§ 23 (1) EStG).

That is what we want to do. However, we actually only want to capture the increase in value that has arisen over a ten-year period. And we succeed best if we can also keep the property. Because then we can repeat the process every ten years. This logically means that we should try to sell the property to ourselves – even if that sounds paradoxical. But we'll get to that later.

4. Reinvesting profit on the sale of real estate

First of all, it is important at this point that we realize the profit and reinvest it. So we buy the next property, for which we again make a debt financing. Since we sold the first property to ourselves, we can now make our rental with the accompanying, previously described tax advantages twice. In addition to the current rental income, we also receive the further increase in the value of both properties. And this is now also carried out for ten years in order to sell the properties to yourself again.

However, where a balance between rental income and advertising costs can be expected in the first ten years, we now have to deal with higher depreciation. After all, we have transformed the increase in value of the first property into new, higher acquisition costs. And they lead to higher depreciation. Consequently, leasing the real estate is a loss-making business from a tax point of view.

In this context, however, losses are advantageous because they can be offset against other positive incomes. This can include, for example, a high employee salary, which may also include a GmbH managing director salary. The rental of the real estate therefore means on the one hand that it can be designed tax-free, but on the other hand that you can also optimize other income for tax purposes.

5. Selling real estate to yourself: 2 designs

Now it is time for us to clarify how we can arrange the actually impossible sale of the properties to ourselves. And it is time for us to admit that this is only meant in a figurative sense. Because a sale of objects to itself is of course legally excluded. So we use two designs that help us in other ways to achieve the same effect as in a supposed sale to ourselves.

5.1 Selling Property to Spouses

In the first design variant, we ask our spouses to buy us our property after the speculation period has expired. Since in this case we can benefit from an exception in the Real Estate Transfer Tax Act, the transaction remains tax-free also with regard to the Real Estate Transfer Tax (§ 3 no. 4 GrEStG). Our spouse then practically acts as our tax clone. Because the tax advantages through depreciation and the other advertising costs are then due to him or her, thus remain in the partnership, although at the same time the real estate property remains in the partnership.

But there is another advantage. In this way, we can use tax advantages bundled together through the assessment. Because if one spouse also makes other taxable income, he or she can use losses of the other partner to save taxes. Losses such as those that can arise from the rental of real estate.

5.2. sell property to own Immobilien-GmbH & Co. KG

The second design is a bit more complicated, but is much closer to the statement that you can sell real estate to yourself. For this purpose, we as individuals establish a GmbH & Co. KG. To them we sell our own property after the speculative period. Since GmbH & Co. KG is a partnership, taxation takes place transparently at the level of the shareholders. In our case, this is again where we had already taxed the taxation of the property that was still held in private assets at the very beginning, namely on a private level.

We can therefore take advantage of the same advantages, although the properties are now owned by our GmbH & Co. KG from a purely legal point of view. For this to happen, however, it is necessary for us to shape and shape the partnership commercially in due course. We spare you the details at this point.

However, one must additionally ensure that the tax office does not assess the procedure as misuse of design according to § 42 AO. Therefore, one should definitely consult experts in the field of real estate tax law on this matter.

6. Tax design “Sell real estate to yourself” – Conclusion

On the one hand, it is excluded for various reasons that you can sell real estate to yourself. On the other hand, you can follow several approaches to achieve practically the same effect. Of these, the sale to the own real estate GmbH & Co. KG is even suitable for single persons. This means that you can realize the increase in the value of real estate tax-free, but at the same time de facto keep it. Furthermore, you can generate tax losses, which can both neutralize the rental income tax and ideally serve to minimize other income. In this way, you have the opportunity to achieve several tax advantages at the same time, while the value of the properties continues to increase over time. Moreover, this control design is anything but static. Because the longer you implement this design, the more possibilities it offers. With each new property, the potential to achieve further or greater tax benefits grows.