Tax Experts: Tax Rented German Real Estate Fairly Instead of Expropriating It

Comparatively small corrections in income tax, trade tax, inheritance tax, and real estate transfer tax could remedy these problems and increase tax revenue without burdening economic development. “Legislators could think about taxing capital gains for income tax purposes beyond the current ten-year period, abolishing the trade tax exemption for real estate corporations, and reforming the real estate transfer tax,” Hey says. Moreover, this would generate additional tax revenue in line with the system.

“In the case of rented real estate, the double benefit of unlimited deduction of income-related expenses and tax exemption of capital gains is one of the last remaining major tax incentives under Germany’s income tax law. Capital gains ought to be fully taxed,” Spengel says.

Furthermore, the authors write that the profits of real estate companies are not subject to trade tax if they are attributable exclusively to the administration and management of the company’s own real estate, including profits from its sale. A real estate corporation can collect its rental income and profits from the sale of real estate without paying trade tax, so only the corporation tax of 15 percent is due.

According to the authors, the inheritance tax favors large housing portfolios if their management requires a commercial business operation, with the tax authorities assuming that this is the case for portfolios of 300 apartments or more. There is absolutely no justification for this privilege. “The tax authorities’ approach in practice is conspicuously contrary to the principle of equality, because only particularly large portfolios can enjoy this incentive,” the authors write.

Fuest, Hey, and Spengel also criticize the fact that real estate companies often buy and sell properties free of real estate transfer tax. Avoiding this tax is legal if buyers do not purchase real estate directly, but instead buy shares in corporations that own the real estate.