German Property Income and the American Owner

German property income is taxed in Germany at source. A non-resident owner files a German return confined to that income; a resident owner files on worldwide income at the progressive rates, with the solidarity surcharge and, where applicable, church tax on top.

The deductible items are not the American ones. German depreciation on a residential building runs at statutory rates over a statutory life, interest on the acquisition loan is deductible, and maintenance is deductible while improvement is capitalised. An owner who computes the German result from the American schedule will reach the wrong figure in both directions.

Alongside the income tax sits Grundsteuer, the recurring municipal land tax payable by the owner. It was reformed with effect from 1 January 2025 after the Constitutional Court struck down the old values, every owner had to file a fresh declaration, and the amount now payable can differ substantially from what the previous owner paid. An American who inherits or buys German property takes on that obligation with the property.

Germany taxes a gain on the disposal of private real property only where the sale falls within ten years of the acquisition, under section 23 EStG. After ten years the gain is outside the German charge altogether. Within the period it is taxed at the owner’s progressive rate, not at the flat investment rate.

The United States has no equivalent period. A citizen or resident is taxed on the gain whenever the sale occurs, and the gain is computed in dollars: the dollar cost of the euro purchase price against the dollar proceeds of the euro sale price. A property bought for 500,000 euros and sold for 500,000 euros has made no gain in Germany and may have made a substantial gain in the United States if the euro has strengthened in between. There is then no German tax to credit against it.

The mirror image also occurs: a German gain within the ten-year period, taxed in Germany, against which the American credit is limited by the separate limitation categories. Neither direction is unusual, and both are decided by the dates and the exchange rates rather than by anything the owner does at the time of sale.

The income treaty, signed on 29 August 1989 and substantially amended by the protocol of 1 June 2006, gives the country where the property sits the primary right to tax income from it. Germany, for income on the other side, applies the exemption method to American rental income and to salary for American work, exempting the income but taking it into account in fixing the rate on the rest under section 32b EStG. The credit method applies to most investment income.

The effect of the exemption with progression is that exempt income raises the German rate and can never lower it. A German resident with American rental income therefore pays German tax on the German income at a rate set as though the American income had been taxed too.

For an American citizen the relief runs through the foreign tax credit, under Article 23 of the income treaty and sections 901 and 904 of the Internal Revenue Code, subject to the separate limitation categories and to the re-sourcing rule in Article 23(3)(c) that deems the income to arise in Germany so that the credit is available at all. The credit is not a refund: it relieves American tax to the extent there is American tax on that category of income, and no further.

German property in American hands produces two tax returns every year and two different gains on a sale. Germany taxes the rent at source and releases the gain after ten years; the United States taxes both without a holding period and measures the gain in dollars. The dates and the exchange rates decide the result, which is why the acquisition record and the ten-year date are the two things worth establishing before anything else.