Real Estate Investment Model
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Investment in 3 Phases
Purchase
The total investment amount consists of the purchase price and relevant closing costs.
Growth
Over the lifetime of the investment, its value appreciates.
Sale
When the investment is sold after 10 years, no tax is owed on the capital gains.
Legal & Taxes
Legal Aspects
- Germany has an airtight legal system, boasting a strong rule of law with highly protective property rights, a strong institutional property registry and streamlined notarization process.
- When investing, there is no need to travel to Germany. Power of Attorney (POA) can be granted to an independent solicitor who can exercise the contract and sign in person with the notary.
- Investors are not required to have German citizenship or have a German domicile to own property in Germany.
- In accordance with the German Constitution, expropriation of property is nearly impossible and the property value will always be compensated.
Taxes
- Non-resident tax payers are liable for German income taxes for German real estate.
- Rental income is subject to German personal income tax.
- Typically, all capital gains on the sale of real estate in Germany are taxed in Germany.
- Gains from disposal of real estate held for more than 10 years are not subject to capital gain taxes, this is determined on a country-by-country basis.
- There are international double tax treaties entered into by Germany which allocate the right to tax income derived from real estate levied in Germany, to Germany.
- Taxable depreciation rates for an investment in real estate range from 2-3% per year.
- Interest expense on the loan is tax deductible, and largely offsets rental income.
- Other ongoing expenses associated with the investment are tax deductible.
Relevant Rental Laws
Tenant Rights
In Berlin, a landlord can only serve tenants notice that the owner will be moving into the apartment 10 years after the purchase, if the current tenants were occupying the apartment before the ‘Teilungserklärung’ (declaration of division) came into effect. If the current tenants moved in after the ‘Teilungserklärung’ came into effect, they can be served notice in under 10 years. In Leipzig, this period is limited to three years. Only unrented flats can, with certainty, be moved into at will.
Rent Ceiling
A rental ceiling was introduced in Germany in 2015. This means that rents cannot exceed 10% of the local average rent for a current or new tenant, according to the Mietspiegel (rent index). Additionally, rents can only be raised by a cumulative 15% every three years, or 4.77% annually. The legislation does not apply after a renovation or furnishing of the flat.
Milieuschutz (Social Preservation Statutes)
This federal construction law allows municipalities to issue social preservation statutes to spare them from negative consequences of urban development, if a certain area’s population structure changes significantly. The law is aimed at dampening rents to protect the population structure in a certain area by mandating approvals for several modernizations and other changes to property.
Umwandlungsverbotsverordnung
The state of Berlin has issued a directive prohibiting the private purchase of entire apartment buildings and converting them into single units within the boundaries of social preservation areas. Together with the Government Neighbourhood Protection, the two directives have already shortened supply on the property market in Berlin and led to a price increase for property in the respective areas.
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Lilly Yakusheva
Real Estate Consultant
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