Imagine you bought a property as an investment nine years ago and now want to sell it. The selling price is significantly higher than the original purchase price and you are already looking forward to a considerable profit. But before you realize this profit, you learn that capital gains may be taxable. This is where the so-called speculation period comes into play.
First, the good news: in principle, the sale is tax-free. No capital gains tax is payable on the sale of real estate used for residential purposes. The situation is somewhat more complex if the owner wishes to sell an investment property —such as an apartment building or a rented apartment, etc.—that they have owned for less than ten years . In this case, the speculation period would apply. However, after ten years, the tax liability would no longer apply.
Real estate that is part of business assets is completely exempt and is never subject to this exemption. Profits from the sale of real estate that is part of business assets are always taxable, regardless of how long the property has been owned.
However, if a private property owner were to rent out a commercial property privately, and the property were not part of business assets, this property could be sold tax-free after ten years.
The most important facts about the speculation period at a glance:
- Period: The speculation period for real estate that was not used by the owner for their own residential purposes is ten years. This means that you must hold a rented property for at least ten years before you can receive the proceeds from the sale tax-free.
- Start of the period: The period begins when the purchase agreement (the binding transaction) becomes legally binding.
- End of the period: When the buyer and seller are back at the notary's office and "the ink is dry."
- Speculation tax: If the sale takes place within the speculation period, speculation tax is payable on the capital gain. The amount of tax depends on the seller's individual income tax rate.
How capital gains tax is calculated
The capital gain is the difference between what you paid for the property (acquisition costs) and what you receive for it when you sell it (selling price).
There are various costs that can be deducted from the proceeds of the sale, including:
· Incidental purchase costs such as notary, land registry, real estate transfer tax, and brokerage fees.
· Expenses for modernization and maintenance, such as the renovation of windows, sanitary facilities, or the heating system.
· Selling costs such as renovation costs for preparing the property for sale, real estate agent fees, or early repayment penalties for the credit institution.
However, depreciation claimed in your income tax return must be added to the capital gains when selling the property.
The amount of tax on the capital gain depends on your personal income tax rate. The profit from the sale is added to your total income for the year and then taxed according to your individual tax rate.
In recent years, real estate values have risen sharply in some cases, leading to high capital gains. These high gains usually also mean high tax rates. Overall, the tax burden can therefore often amount to a good half of the capital gain.
Simplified calculation example for capital gains tax on the sale of real estate after 9 years
Imagine that on January 1, 2015, you purchased a property for €250,000 (including incidental acquisition costs) and then rented it out. Nine years later, on January 1, 2024, you decide to sell this property for €350,000. During this time, you did not use the property yourself, and your individual income tax rate is 45%. The annual depreciation of 2% on the original building value was €3,000. For the sake of simplicity, expenses for modernization and maintenance are not taken into account.
- Given values:
Acquisition costs (January 1, 2015): €250,000 (land value share €100,000)
Sale price (January 1, 2024): €350,000
Holding period: 9 years
Annual depreciation: 2% or $3,000
Individual income tax rate: 45% - 1. Calculation of capital gains:
Capital gain = sale price - (acquisition costs - (depreciation x holding period))
Capital gain = $350,000 - ($250,000 - (2% x $150,000 x 9 years))
Capital gain = €350,000 - (€250,000 - €27,000)
Capital gain = $127,000 - 2. Calculation of speculation tax:
Speculation tax = capital gain x individual income tax
Speculation tax = $127,000 x 45%
Speculation tax = $57,150 - 3. Result:
When the property is sold after 9 years, a speculation tax of €57,150 is payable.
When is the sale tax-free?
The sale of privately owned real estate in Germany is generally always tax-free, provided that you use the property as your own residence. This means that the sale of your house or apartment is tax-free. If, for example, the property is an investment property, such as a rented house, you must have owned it for ten years in order to sell it tax-free.
However, there are exceptions and special regulations that can shorten or suspend this period. Here are two common examples:
- Two New Year's Eve rule after renting:
To prevent property owners from gaining tax exemption by moving in at short notice shortly before selling their rented property, the colloquial two New Year's Eve rule was introduced.This means that the property can be sold after three years without any capital gains tax. The three-year period simply means that the property must have been occupied for two consecutive New Year's Eves (December 31). So, if an apartment was purchased on February 2, 2022, then rented out, and then occupied by the owner in December 2022, it could be sold tax-free in January 2024 (the binding transactions are also decisive here).
- Inheritance or gift:
For the heir or donee, the holding period of the testator or donor generally applies. In other words, the time continues to run. The heir or donee is exempt from speculation tax if the joint holding period with the previous owner exceeds ten years. Inheritance or gift tax are not taken into account in this consideration.
Can I hire a real estate agent to sell my rented property before the 10-year period has expired?
Yes, you can start preparing to sell your property before the ten-year period expires without incurring any tax disadvantages with regard to the speculation period. The mere intention to sell the property has no influence on the speculation tax.
The speculation period begins when the purchase agreement is signed and ends when the new buyer takes legal possession of the property. If there are parties who cannot be present, such as an aunt in America, the agreement only becomes legally binding once she has approved it in the US; only then would the speculation period end.
Another approach would be to draft the contract in such a way that it only becomes binding after the ten-year period has expired. This can be done by including a clause in the contract stating that the effectiveness of the purchase agreement is postponed to a date after the deadline. However, such agreements must be precisely worded in order to avoid legal and tax problems. However, we strongly advise against using such constructions, as they are complicated and can easily lead to misunderstandings or errors. It is safer and easier to wait until the period has expired and only then sell. This way, you avoid any risk and can be sure that the capital gains remain tax-free. A real estate agent can start their work even before the period has expired.
Kartheuser Immobilien: Sell your property with complete peace of mind thanks to expert advice
Are you selling your property in Mettmann, Ratingen, Velbert, or the surrounding area and want to avoid any pitfalls? We would be happy to take the time to discuss your situation in a personalized consultation and explain the applicable regulations to you.
After conducting a comprehensive analysis, our experienced real estate experts will be happy to point out any potential need for advice from your tax advisor. We expressly cannot and do not wish to provide tax advice. With our expert advice and support, you can sell your property safely and stress-free.
Contact us now and arrange your free initial consultation!
