Introduction: Reasons for Real Estate Purchase
Real estate investments have long been favored in Germany due to their security and attractive yield opportunities. When considering buying real estate in Germany, it’s important to differentiate between properties for personal use and those for investment purposes.
In this article, we will explore key considerations for purchasing real estate in Germany, addressing questions such as mortgage rates, the benefits of owning a home versus a rental property, tax implications, and the taxation of rental income. By delving into these topics, we aim to provide valuable insights to guide your investment decisions.
Differences in Mortgage Rates One crucial question revolves around whether mortgage rates differ when financing a personal home compared to a rental property. In our experience as financial advisors, there is generally no distinction in mortgage rates based on the type of property. Banks primarily assess your financial situation to determine your mortgage repayment capacity.
However, it’s worth noting that certain banks may have specific financing criteria. Some banks may limit rental property financing to within a certain distance of your primary residence, while others exclusively finance homeownership. Therefore, the availability of mortgage options may vary depending on the bank’s internal policies. Although slight differences in mortgage rates might exist, the interest rate is typically the same. The significant disparities arise from a tax perspective, which we will explore further.
Homeownership versus Rental Property After addressing potential differences in mortgage rates, another vital consideration is whether owning a home or a rental property is more advantageous. This decision should be assessed from both a personal and financial standpoint.
From a personal perspective, individuals who have rented properties understand the limitations of personal freedom, such as restrictions on activities, pet ownership, and space utilization. Homeowners, on the other hand, enjoy the autonomy to customize their living space according to their preferences.
From a financial standpoint, owning a home allows participation in the rising real estate market, which experienced an average growth of 14.2% in 2021 (adjusted for inflation). However, homeownership lacks the tax advantages associated with rental properties, which we will discuss in the section on taxes.
Furthermore, renting spares individuals from bearing the costs of repairs and renovations, expenses that are inherent to real estate investments but offer tax advantages.
Consequently, these financial savings can be invested profitably elsewhere. Evaluating the personal and financial aspects of this decision can be complex, and we provide a more in-depth analysis of the renting versus buying debate in another article.
Taxes on Real Estate When examining tax advantages and disadvantages, it becomes evident that the German government does not discriminate based on the location or nature of your residence. Instead, the tax treatment primarily revolves around whether you intend to generate a profit from the property. Let’s explore the tax implications associated with two scenarios:
- Rental Property: When renting out a property, the tax office assumes that you aim to generate a profit. Consequently, all related expenses become tax-deductible. These expenses include mortgage interest payments, property acquisition costs, land transfer taxes, notary fees, renovation expenses, and real estate agent commissions. Additionally, you can depreciate the property by deducting 2% of its value each year, as it is considered to lose 2% of its value annually from a tax perspective. It is even possible to deduct the fees of a professional property management company responsible for rental management.
- Property for Personal Use: In the case of a personal home, since it does not provide accommodation for others, there are minimal tax benefits. Expenses incurred are generally not tax-deductible, with only occasional deductions for minor renovation costs. This often results in significant out-of-pocket expenses for homeowners.
Considering these tax differences is crucial when deciding between owning a home and owning a rental property. The tax advantages associated with investment properties can lead to substantial profits, benefiting investors not only in the present but also in generating passive income for retirement. These tax benefits have contributed to the wealth accumulation of many real estate investors.
Taxation of Rental Income Beyond tax advantages, investment property offers the additional benefit of generating monthly passive income through rentals. However, it’s important to understand how rental income is taxed in Germany.
Rental income taxation follows a similar framework to general income taxation. Rental income is subject to tax rates of up to 45%. However, you can receive up to €10,347 of rental income tax-free per year.
Rental income is added to your earned income, and if your overall income exceeds €10,347, both sources are subject to taxation. The tax benefits stem from the fact that, during mortgage repayment, your real estate income is often negative (due to tax-deductible expenses & property depreciation). Consequently, your overall tax rate may be lower compared to not owning a rental property.
Example: Suppose you have purchased a rental property worth 200,000€ and the depreciation of the property shown in tax filing is 4% ( After confirmation by Immobilien gutachter* ) then you can show 8,000€ in expenses depreciation + considering other tax-deductible costs, your real estate income is -€10,000 per year. Suppose your taxable earned income is €50,000 per year,
As a result, your taxable income decreases to €40,000 per year, meaning you won’t pay taxes on the €10,000 of earned income.
This depreciation is only on paper, actually, the value of the property is increasing due to inflation and many other factors. So overall you are saving a lot of taxes and your invested real estate is appreciating its value.
Conclusion: Finding the Best Fit for Your Situation Now equipped with a brief overview of real estate in Germany, it’s essential to carefully weigh the various questions and considerations. Fortunately, there is no one-size-fits-all approach; the decision depends on your unique circumstances. Contrary to the misconception that renting is a waste of money, both options have valid arguments.
However, understanding the financial and personal impacts of your choices is crucial. If you are already searching for a property or have found one, we are here to provide support.
We have strong partnerships with over 450 banks and can assist you in finding the best interest rate for your financing needs.
Feel free to schedule a free meeting with us for personalized guidance.
