Tax Advantages for Austrians with German Real Estate

Austrian investors have increased their investments in the German real estate market by over 12 percent between 2019 and 2023. This development is not coincidental - the tax framework for Austrians with German real estate offers significant optimization opportunities that, when applied correctly, can lead to considerable tax advantages.

The taxation of foreign real estate between Austria and Germany follows complex bilateral regulations. While Austrians are generally liable for tax on their worldwide income, the double taxation agreement and national special regulations create interesting structuring opportunities. German real estate is particularly attractive due to linear depreciation, the 10-year rule for tax-free capital gains, and the full deduction of interest expenses.

In this article, you will learn all the important aspects of the tax treatment of German real estate for Austrian investors - from the basic tax advantages to advanced optimization strategies.

The most important tax advantages at a glance

As an Austrian, if you wish to purchase real estate in Germany, you have tax advantages that can lead to significant savings when strategically utilized:

Depreciation (AfA) of 2-3% of the building acquisition costs annuallyrepresents the largest ongoing tax advantage. This linear depreciation for wear and tear continuously reduces taxable income in Germany over decades.

Full deduction of interest expenses for financing costsof the German property allows all interest to be claimed as business expenses. This applies to both Austrian and German financing.

Tax-free capital gain after a holding period of 10 yearsin Germany makes long-term real estate investments particularly attractive. Unlike in Austria, where the real estate gains tax (ImmoESt) is 30 percent, capital gains are tax-free after the speculation period.

Thedouble taxation agreement prevents double taxationby crediting the German tax against the Austrian tax liability. Austria provides relief for taxes paid abroad.

ThePossibility for tax-optimal financing structureFlexibility in design is offered through Austrian or German banks. Depending on personal circumstances, different financing models can lead to various tax effects.

Rental income and depreciation options

German rental income is subject to limited tax liability in Germany, which means that Austrians are only liable for tax on their German real estate income there. This regulation brings both advantages and peculiarities.

Depreciation reduces the annual tax burdenby 2-3 percent of the acquisition costs of the building. A distinction is made between land (not depreciable) and the building. Linear depreciation occurs over 33 years for new buildings (3 percent) or 50 years for existing buildings (2 percent).

Deductible expensessuch as maintenance, management, and financing costs are fully deductible. These include:

• Repair and renovation costs

• Property management fees

• Insurance premiums

• Property tax

• Interest on real estate loans

• Travel expenses to the property

TheProgression reservation in Austriatakes German income into account for the tax rate but does not tax it twice. The German income is used to determine the progressive tax rate, which is then applied to the remaining Austrian income.

Practical calculation of depreciation advantages

A concrete example illustrates the extent of the tax advantages: For a property valued at 300,000 euros with a building share of 250,000 euros, an annual depreciation of 5,000 to 7,500 euros results.

The depreciation reduces the taxable income in Germany accordingly. With a marginal tax rate of 30 percent in Germany, theTax savings amount to 1,875 to 2,250 euros annually.This savings recurs over the entire depreciation period of 33 to 50 years.

In addition to depreciation, Austrians as foreigners with limited tax liability in Germany can claim further deductible expenses. For a rented apartment, these often total 1,000 to 3,000 euros annually, which means additional tax savings of 300 to 900 euros at the corresponding marginal tax rate.

Capital gains and the 10-year rule

The German taxation of capital gains from real estate sales offers significant advantages for Austrian investors compared to the domestic regulation. Selling after a holding period of 10 years is completely tax-free in Germany - a marked difference from the Austrian real estate capital gains tax of 30 percent.

Sales within 10 yearsare subject to the German speculation tax. The profits are then taxed as income from private sales transactions and are subject to the progressive income tax rate.

Austrian taxation of real estate gainsfrom private assets does not apply to German real estate due to the double taxation agreement. The right to tax lies with the state where the property is located, namely Germany.

Strategic holding periodallows for completely tax-free capital gains. This regulation makes German real estate particularly interesting for long-term wealth strategies. An Austrian who purchases a German property for 400,000 euros in 2024 and sells it for 600,000 euros in 2035 pays no tax on the profit of 200,000 euros in Germany.

Double taxation agreement Austria-Germany

The double taxation agreement (DBA) between Austria and Germany from 2002 regulates the tax treatment of cross-border income and forms the foundation for the taxation of Austrian property owners in Germany.

Taxation rights for real estate incomeare fundamentally with Germany as the country of location. Article 6 of the DBA assigns the primary taxation rights for income from immovable property to the state in which the property is located.

Austria credits German taxagainst the Austrian tax liability. The crediting procedure prevents double taxation of the same income in both countries. However, the credit is limited to the amount of the Austrian tax attributable to the foreign income.

Avoidance of double taxationis carried out according to the crediting procedure. Austria taxes the worldwide income of its residents but credits the tax paid in Germany. In cases of higher German tax rates, this can lead to a relief.

Theprogression reserve in Austriacan, however, increase the overall tax rate. Although German income is not doubly taxed, it is included in the calculation of the progressive tax rate for Austrian income.

Limited vs. unlimited tax liability

Austrians residing in Austriaare subject to limited tax liability in Germany. This means that only the German real estate income is subject to German taxation, not the entire worldwide income.

The limited tax liability has both advantages and disadvantages:

Advantages:

• Only German income is taxed in Germany

• No disclosure of Austrian assets required

• Clearer delineation of tax liability

Disadvantages:

• Allowances and special expenses are limited

• No basic allowance for limited tax liability

• Fewer options for tax optimization

Financing advantages and interest deduction

Financing German real estate offers Austrian investors several tax optimization opportunities.Interest for German real estate financing is fully deductible in Germanyand significantly reduces the tax burden.

Austrian financingcan be conducted at EUR conditions without currency risk. Austrian house banks often provide personal support and are already familiar with the customer relationships. The interest is deductible as business expenses in Germany, regardless of where the loan was taken out.

German financingoften offers more favorable interest rates for German real estate, as banks can better assess the local market environment. Additionally, German banks are familiar with local valuation standards and can often offer higher loan-to-value ratios.

Equity share of at least 20 percentsignificantly improves financing conditions. German banks typically require a lower equity share than Austrian banks.

Ongoing tax burdens and optimization

In addition to the significant tax advantages, ongoing tax burdens also arise with German real estate, which must be taken into account in the overall assessment.

Property tax in Germanyis significantly lower than the Austrian property tax. While in Austria, property tax often amounts to 0.5 to 1 percent of the assessed value, the German property tax typically only amounts to 0.1 to 0.3 percent of the assessed value.

Property transfer tax between 3.5 and 6.5 percentdepending on the German federal state must be paid upon purchase. This one-time burden varies significantly:

• Bavaria and Saxony: 3.5%

• Baden-Württemberg: 5.0%

• North Rhine-Westphalia: 6.5%

• Schleswig-Holstein: 6.5%

Annual tax declaration obligation in Germanyfor real estate income means additional effort. Austrian property owners must submit a German tax declaration by July 31 of the following year.

Tax advisory services by a German tax consultantis often advisable, as German tax laws are complex and change regularly. The costs for tax advice are deductible as business expenses.

Property Tax Reform 2025

The comprehensive reform of the German property tax will bring significant changes starting in 2025:

The new property tax is based on current property valuesinstead of outdated unit values from the 1960s. This leads to a more realistic assessment of properties as a basis for taxation.

Strategies for Tax Optimization

Advanced strategies for tax optimization can further enhance the benefits of German real estate for Austrian investors.

Timing of property acquisition and salefor optimal tax effects plays a central role. The timing of purchase determines the 10-year period for tax-free capital gains, while the timing of sale influences the actual tax burden.

Concentration of renovation measuresin tax-favorable years can reduce the overall burden. Major renovations should be carried out in years with high rental income to maximize the tax effect.

Important Pitfalls and Risks

Despite the significant tax advantages, there are some pitfalls in German real estate investments for Austrians that can lead to unexpected burdens if planning is insufficient.

Progression reservation can increase the Austrian tax rate. Although German income is not taxed twice, it raises the marginal tax rate for Austrian income. With high German rental income, this can lead to a significant additional burden on Austrian income.

Currency riskThe difference in financing and lease contract conditions is minimal, as both countries use the Euro. However, differing inflation rates and interest rate developments in both countries can lead to shifts.

To be on the safe side, seek advice from experts like us (CDL Immobilien).

Timely tax planning

Tax advice should take place before real estate acquisition.Many structuring options can only be implemented before the purchase. Subsequent optimizations are often more difficult or impossible.

Simulation of various scenariosfor purchase, holding period, and sale helps to develop the optimal strategy. Various assumptions regarding rental development, value appreciation, and changes in tax legislation should be taken into account.

Documentation of all tax-relevant expenses and incomeis essential for the annual tax returns in both countries. Clean bookkeeping not only facilitates tax filing but also maximizes deductible costs.

Regular review of tax optimizationin changing circumstances ensures that the strategy remains current. Changes in laws, personal situations, or real estate markets may require adjustments.

A systematic approach includes:

1. Tax advice before the purchase decision

2. Structuring of financing

3. Ongoing optimization of advertising expenses

4. Timely planning of renovation measures

5. Strategic decision on holding period or sale

The tax advantages for Austrians with German real estate are significant but require professional planning and support. However, if implemented correctly, they can lead to considerable savings and an optimized asset structure. Investing in competent tax advice usually pays off multiple times through the realized tax benefits.

If you would like to benefit from the tax advantages and attractive returns of German real estate, we are happy to assist you.