Anyone who wants to buy and rent real estate privately in order to preserve the option of a tax-free sale can raise tax optimization potential via external financing of the acquisition costs. We look at real estate taxation in comparison, considering various sources of money as a debtor. On the one hand, the spouse or the own GmbH comes into question. On the other hand, we are also investigating the taxation that arises when a German or Liechtenstein foundation takes over the financing.

1. Taxation of Real Estate in Comparison – Introduction

Successful entrepreneurs are always looking for ways to reinvest their profits. On the one hand, you can invest in your own company. However, this also means getting involved in a lump risk. So what makes more sense in such a situation than renting real estate? However, one certainly wishes that the later sale is as tax-efficient as possible. In this respect, the private acquisition of land is unbeatable. After ten years, the sale is completely tax-free possible. Until then, however, you have to tax the rental income with a personal tax rate on the income tax. This means that there is a high risk that rental income will be taxed at the top tax rate of 42 % or even at the so-called rich tax rate of 45 %. In addition, there is often also the solidarity surcharge and/or the church tax. Overall, we can talk about almost 50% taxation.

We want to offer a way out which, on the one hand, makes private acquisition possible, so that the sale can take place tax-free after the ten-year speculative period. On the other hand, we also want to relieve taxation of this high level. Therefore, we now look at the taxation of private real estate in comparison and use four designs.

2. Taxation of real estate in comparison: financing of the acquisition

Right from the start, we will reveal how we will make it possible for taxation to be significantly reduced, namely through financing. If you buy a property, you need capital. If you have limited resources, it makes sense to raise external capital. Banks usually offer financing of up to 80% of the acquisition costs at a relatively low interest rate. The property to be acquired is regarded as security. But if you want to push the equity share even further below the 20% mark, you usually have to find another source of financing. However, the interest rate will then be significantly higher.

If one now approaches the spouse with these circumstances in mind, knowing that he has the necessary debt capital, then one can agree with him a correspondingly high interest rate without the tax office detecting a violation of the arm's length principle.

Ideal is an interest rate that corresponds to the expected return from the real estate rental. If this is about 5 % and you also pay 5 % of the rental income in interest costs, no more taxable income remains; The tax is therefore virtually eliminated. For this, however, the spouse must now tax the interest income. However, the taxation here takes place via the capital gains tax. And their tax rate is a flat rate of 25%. Although solidarity surcharge and relationswiese or church tax can also be incurred here, whereby advertising costs can be deducted up to EUR 1,000 via the savings lump sum, the result is significantly lower than the tax amount that would be paid in a conventional rental without deduction of financing costs.

So this is our first proposal when comparing property taxation. Also relevant is the fact that you can benefit from this arrangement through the co-investment of spouses, because both incomes are taxed together. As a result, the tax rate can often be significantly reduced.

3. Taxation of real estate in comparison: GmbH financing

Next, we consider whether the own GmbH is suitable for financing the private real estate acquisition. In fact, the GmbH would tax the interest income it receives for the transfer of the outside capital to its shareholder with corporation tax and business tax. Corporate income tax is incurred at a flat rate of 15 %. In the next few years, the tax rate is to gradually fall to 10% according to the plans of the Federal Government. Then there is the business tax, which is also about 15%.

However, it should also be noted that taxes are also incurred in the case of a profit distribution. This can lead to a flat-rate capital gains tax of 25 % at the private level, plus any other taxes (see above). Or the dividend goes to a limited company as a holding company, where then according to § 8b paragraph 5 KStG 1,5 % of taxes are charged.

In a direct comparison of the taxation of real estate, we come with this financing variant on a similarly high tax as in the case of financing by a spouse.

4. Taxation of real estate in comparison: financing by the German foundation

Let’s say the taxable person we are supposed to advise has previously set up a family foundation in Germany. This is now to finance the property acquisition. Since a foundation is a corporation, it also treats the financial administration as an independent tax subject. In our design, our real estate landlord pays interest to the foundation he set up. In this way, in this third comparative case, his tax on rental income ideally fell to EUR 0. But at what tax rate does the family foundation tax the interest income?

Since the family foundation in our case is designed in such a way that it does not carry out its own commercial activity, it can be regarded as exclusively asset management. This is the way interest income is taxed. This means that it only has to pay 15 % corporation tax on it.

5. Taxation of real estate in comparison: Liechtenstein Foundation

And now we are pushing tax optimization to the extreme. We assume that instead of a German family foundation, one in Liechtenstein was preferred. How much tax does this entity pay on the interest income accrued from Germany?

To put it briefly: none. Because Liechtenstein only levies income taxes on profits incurred domestically. However, since the interest payments from Germany flow to the foundation in Liechtenstein, they remain tax-free there. And in Germany, within the scope of our considerations, only real estate rental is taxable. We have already explained in all three previous variants that the taxable rental income is hardly taxed anymore due to the high interest costs. This is an essential element of our tax structure, which is also valid in this comparison of the taxation of real estate.

6. Taxation of real estate in comparison – Conclusion

So let’s make the final comparison of how to optimize property taxation. The option of debt financing by a spouse leads approximately to a halving of the tax. It is advantageous here that further control savings potential can also be generated in the case of an arrangement. It is also interesting that you can benefit from it together.

With your own GmbH as a financier, you achieve a similarly high tax reduction to a maximum of 25%. However, this option is only worthwhile if you reinvest the interest income in the GmbH, because you have to expect further taxation on a private level in the case of a profit distribution.

The Family Foundation in Germany is more interesting as a donor. Because it taxes its interest income with only 15 % corporation tax. But even a charitable foundation as a source of external capital can benefit from this.

However, the taxation of real estate in our comparison is best if we use a foundation in Liechtenstein as a donor. While in Germany the financing costs of the real estate owner reduce taxes to EUR 0, the interest income of the foundation in Liechtenstein remains tax-free.

However, we must note that each design is always to be assessed individually. If, for example, there is no foundation, it would rather make sense in exceptional cases to set up one in order to carry out our design. Therefore, all other variants are also tax interesting. So which design is the best depends on the respective taxation of the property as well as on the comparison of personal circumstances.