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Taxation on a self-used property is privileged in Germany

This article explains tax exemption for self-used (owner-occupied) flats in private ownership.

If you bought the property vacant and for yourself and used it all the time yourself, then there is no waiting holding period at all.

This rule only applies to private property owners, not to companies.

If the owner is a partnership under civil law (GbR), all owners should self-use the flat.

A limited partnership (GmbH & Co. KG, or KG structure) or limited company (GmbH, etc.) is a commercial entity according to German law, these owner structures won’t qualify for this tax exemption, even if used solely for asset management purposes.

Tax exemption from capital gains tax on a rented (buy-to-let) property after ten years
In general, there is a capital gains tax in Germany on a property if sold before ten years of ownership.
Depending on the owner structure there is a tax exemption under certain rules for private or so called tax-transparent structures (KG or oHG, GbR).

Privilege on self-used properties
A widely unknown fact is that self-used properties are privileged, and the ten years are reduced to zero (if always self-used) or one full year plus one day.

What if you rented out the property and how to regain the tax advantage after you rent-out
If you want to regain the advantage of tax exemption you need to live in the property for one full calendar year.
The easy-to-remember rule is: “2 new years eve” at least from 31. Dec of the previosus year to 01. Jan of the following year).

What is self-use in German tax law?
However, the privilege is set very tight as §23 EStG of the German Income Tax Law explicitly says that the usage is only for “own living purposes”. This doesn’t mean you need to have your first residence here, a holiday home would qualify too. If you leave the house to family members like your spouse your daughter or your son and you don’t collect rent from them, even then you can qualify for self-use.

Leaving the property empty won’t qualify.
So to leave the property empty doesn’t qualify for the reduction of the holding period. In fact, in some areas of Germany (like Berlin for example) keeping a flat empty could lead to a fine to be paid to the municipality, as this is seen as wrongful use. If you plan to count on this tax exemption, you should consult a tax advisor.

Beneficiary taxation on inheritance between spouses
If you plan to give the property by inheritance to kids (living in this house), or spouses (living in this house) the German Tax Law has the institution of the so-called family home “Familienheim” which is typically the main residence of the family or the couple that is free to inherit up to a certain amount. For deeper advice, asking a tax advisor is highly recommended. (Familienheim, §13 Abs. 1 Nr. 4c ErbStG)

About the author: Alexander is a Berlin based property developer and active real estate investor and co-owner of a brokerage & advisory firm.