Ask a tax advisor on the topic of Real estate taxation

House sale within the speculation period and seller from Luxembourg

December 2, 2014 | 90,00 EUR | answered by Anton Pernitschka

Dear Sir or Madam,

I would need a tax assessment for the sale of a house in Germany that is to take place within the speculation period of 10 years, with the following key data:

- The house was built in 2006 (new construction) and purchased and is located in Germany
- The owners of the house live and work in Luxembourg
- The house was only used by the owner from 2006-2008, since then it has been continuously rented out to non-family members
- Current tenants (for 3 years) are the potential buyers and live in Germany
- The sale is planned for 2014
- The house cost approximately 334,000 EUR in 2006 and is being sold for 580,000 EUR, within the speculation period ending in December 2016, resulting in a profit of around 200,000 EUR

3 questions:

1. What is the tax rate (approximately) for a couple with 2 children who are tax residents in Luxembourg and according to their tax advisor, have to pay taxes on the house sale in Germany?
2. The house was purchased for 334,000 EUR (qualified shell construction), meaning walls (wallpaper, paint), floors, etc. were not included in the purchase price. Can these costs also be deducted from the selling price to calculate the capital gain (see repair and modernization costs in the first 3 years (calculation below)?
3. Should the purchase contract specify that the purchase price will be paid in 2 installments, 300,000 EUR on 22.12.2014 and the remaining 280,000 EUR on 02.01.2015 (and then actually be transferred accordingly), would the realization principle apply, resulting in the profit from the 300,000 EUR in 2014 and the profit from the 280,000 EUR purchase price in 2015 being taxable? Would the profit then be calculated proportionally to the receipt of the purchase price?

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Here is the calculation I have made as a layman after some internet research:

Purchase price according to the notarial contract 580,000
- Kitchen, (possibly satellite system, bus cabling, etc.) 19,000
Proceeds of sale: 561,000
- Acquisition costs (house + garage) 334,000
- Ancillary acquisition costs (real estate transfer tax, notary, etc.) Assumption 5% 16,700
- Repair and modernization costs in the first 3 years 25,000
+ Depreciation
- Advertising costs for sale
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= Capital gain 185,300
Tax rate of approximately 27% ????? 50,031
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Total house purchase after taxation 529,969
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I understand that for a precise calculation, more data would be needed, but my questions are only for rough guidelines.

Thank you for your response!

Anton Pernitschka

Dear questioner,

In the context of an initial consultation and your fee deposit, in compliance with the regulations of this forum, I would like to answer your question.

According to Article 4 of the Double Taxation Agreement with Luxembourg, the right to tax income derived from the sale of real estate in Germany belongs to the state where the property is located (in this case, Germany).

As a result, income in Germany is subject to limited tax liability according to § 1 Abs. 4 EStG because domestic income is present according to § 49 Abs. 1 Nr. 8 a) EStG. Tax is levied according to the basic rate, even if the taxpayer is married, with the basic allowance generally not being taken into account (§ 50 Abs. 1 Satz 1 EStG). In this case, a tax rate of about 40% could be expected.

However, under the conditions of § 1 Abs. 3 EStG, unlimited tax liability can also be requested.

Costs for repair and modernization expenses incurred within the first 3 years after acquisition are considered part of the acquisition or production costs according to § 23 Abs. 3 EStG.

The principle of accrual according to § 11 EStG generally applies. The deliberate creation of income or expenditure flows is generally not abusive even if it clearly aims to minimize taxes (FG Düsseldorf from 23.04.1999, EFG 1999, 964). Profit could then be calculated proportionally to the flow of the purchase price.

The calculation in the example provided can generally be accepted. However, it should be noted that the acquisition/production costs of the house are to be reduced by depreciation. In addition, the stove and sink in a fitted kitchen are considered part of the building (BFH from 13.03.1990, BStBl II 1990, 514). If a fitted kitchen is integrated into the designated area with the surrounding building walls (side walls and back wall), in exceptional cases, acquisition/production costs of the building may also be present according to BFH from 01.12.1970, BStBl II 1971, 162.

The response was based on the description of your situation. Missing or incorrect information about the actual circumstances can influence the legal outcome.

Sincerely,

Anton Pernitschka
Tax consultant