Many property owners who hold and let their properties as private assets are subject to a marginal tax rate of 42%. This applies where taxable income falls between approximately 57,000 € and 270,000 €. For married couples using the income splitting procedure (Splittingverfahren), the double amounts apply in each case. Including the solidarity surcharge (Solidaritatszuschlag), the tax burden amounts to 44.31%.
The ongoing tax burden can be reduced to around 30% if the properties are held through a GmbH (private limited company). The city of Munster has a trade tax multiplier (Gewerbesteuerhebesatz) of 460%. This results in a tax burden of 31.925%. This applies as long as the profits are not distributed to the shareholders. The tax burden consists of corporation tax (Korperschaftsteuer), the solidarity surcharge, and trade tax (Gewerbesteuer). On distribution, an additional 25% withholding tax (Kapitalertragsteuer) (plus solidarity surcharge) is levied, so that the overall tax burden is just over 50%.
Letting property through a real estate GmbH is particularly tax-efficient where the company is entitled to the extended reduction (erweiterte Kurzung) under § 9 No. 1 sentence 2 of the Trade Tax Act (Gewerbesteuergesetz). In that case, there is no trade tax liability, so that the ongoing tax burden is only 15.825% (corporation tax and solidarity surcharge). This is highly attractive even by international standards. Even taking the distribution tax burden into account, the overall burden works out at only around 38%, which remains significantly below the tax burden on privately held assets.
Further Advantages
- Properties held as business assets can be depreciated at 3% where they do not serve residential purposes. Properties in private ownership are generally depreciated at only 2%. Proof of a shorter useful life is permissible in either case.
- On the sale of GmbH shares (rather than the sale of the property itself), there is (currently still) the possibility of structuring the transaction in such a way that no real estate transfer tax (Grunderwerbsteuer) is payable (share deal rather than asset deal), even though the conditions for this are being progressively tightened.
Conditions for the Extended Reduction
The conditions for the application of the extended reduction are, however, strict. The company may only manage and use its own real estate, or in addition to its own real estate, its own capital assets. The management of residential construction projects and the construction and sale of single-family houses, two-family houses and owner-occupied flats is permissible. However, the portion of profit attributable to such activity is not reduced. No other activities may be carried out that are not closely connected to the letting of the property. Activities that are harmful from a tax perspective include:
- the letting of operational fixtures and fittings, for example where a crane is located in a rented warehouse and is let together with the property.
- operating a coffee vending machine.
- the letting of furnished rooms.
The real estate may also not be used in part for the business operations of a shareholder.
Disadvantages
- Properties held within a real estate GmbH are permanently subject to tax. They cannot, unlike privately held properties, be sold tax-free after more than 10 years.
- Where the property is already held as a private asset, its transfer to a GmbH will typically trigger real estate transfer tax.
Conclusion
The real estate GmbH is primarily suitable in cases where ongoing high rental surpluses are generated but where significant capital appreciation is not necessarily anticipated in the long term. Ideally, the decision to use a real estate GmbH is made before the property is acquired.