The definition of investment income includes, in addition to interest and dividends, income from the sale of private real estate, provided that this is done within what is known as the speculation period (Spekulationsfrist). In accordance with Section 32d of the German Income Tax Act, the capital gains tax is always 25 percent of the income generated. In addition, church tax and a solidarity surcharge may also be levied on private investment income. However, thanks to what is known as the savers’ lump sum (Sparer-Pauschbetrag), private investors can claim an allowance for investment income. Since the capital gains tax on property sales is paid directly by the respective credit institution upon receipt of an investment income on an individual’s account, however, investors must issue an exemption order to their bank in order to make use of the saver’s lump sum for their capital gains.
Applied to real estate purchases and sales, withholding tax on investment income is of particular importance in that income generated by real estate investments is exempt from such taxation under certain conditions. While investors must pay withholding tax on investment income from open-ended real estate funds and also on increases in value achieved by selling a property during the speculation period, income from renting and leasing is included in the private tax return. Instead of the withholding tax on investment income, the personal tax rate of the property owner is applied to this income. Depending on whether this is higher or lower than 25 percent, this form of taxation can prove to be an advantage or a disadvantage. For this reason, private investors should also pay regard to the associated tax modalities in order to accurately weigh up the profitability of possible real estate investments.
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References
A complete current version of Section 32d Separate Tax Rate for Income from Capital Assets can be found at “Gesetze im Internet“, an official website of the Federal Ministry of Justice and Consumer Protection.
As of January 1, 2021, the exemption amounts for the solidarity surcharge were increased so drastically that in the majority of cases it was either completely eliminated or at least significantly reduced. You can find more information about the extensive abolition of the solidarity surcharge in the official FAQ of the Federal Ministry of Finance.
Cf. Income Tax Act (EStG) section 20. In paragraph 9, you will also find the current level of the tax-free allowances for single assessment and jointly assessed spouses.
