When the sale of a house is tax-free – and when it is not
When selling a property, you have to reckon with certain incidental costs – and taxes may also be incurred under certain circumstances. Six things you should know about taxes when selling real estate.
Ideally, when you sell a property, you already know that there are certain incidental costs involved. The entry in the land register, the costs for brokers, the preparation of the energy certificate – all these are items that you can not avoid.
But it can also happen that you have to pay taxes when selling the house or apartment. But this is only the case under certain circumstances. We explain when taxes apply and how you might be able to avoid them.
1. Caution, speculation tax!
For the sale of real estate and land, the state has set a speculation period: If you buy and resell a property within ten years, you must pay speculation tax on the profit made in the process.
This does not apply if you have lived or still live in the property.
This tax is not the same for everyone, but depends on the personal tax rate. Accordingly, top earners in a high tax bracket must pay significantly more speculation tax than normal earners.
Example: Michael invests in a small condominium in 2013 and pays 150.000 euros. It is already rented when she buys it and he never lives there himself. Now he wants to sell the apartment. Because it has a good location, it is now worth significantly more. Michael finds a buyer and achieves a price of 200 in 2018.000 euros.
Since there are less than ten years between purchase and sale, the speculation period has not yet expired. Michael must therefore pay speculation tax on the profit.
2. Tax-free if owner-occupied
The example shows how much speculation tax can gnaw away at the profit from a property sale. However, there is a special rule: If you have used the house or apartment yourself, the speculation tax does not apply. In this case, it does not matter if the speculation period between the purchase and sale is less than ten years.
If you have lived in the property yourself the whole time, this is a clear case of owner-occupation. This also applies if the property was owner-occupied in the year of sale and the two previous years.
Example: Miriam buys in 2010 for 300.000 Euro a house and rents it out until 2012. She moves into the house in 2014 and lives there until she rents it out in 2019 for 400.000 Euro sold. Although there are less than ten years between purchase and sale and Miriam had rented out the house temporarily, she does not have to pay speculation tax. From a legal point of view, this is owner-occupation and the profit of 100.000 euros is tax-free.
Tip: For owner-occupation to exist, the property does not necessarily have to be the main residence. Even in the case of a mainly owner-occupied vacation home, the state assumes owner-occupancy.
3. Do not exceed the three-property limit
When selling a house, the speculation period is not the only thing you have to consider from a tax point of view. Because sooner than you think, you are legally a real estate dealer and must register a business!
The so-called three-object limit is decisive here: if you sell three or more properties or plots of land within five years, this is classified as commercial real estate trading.
If this is the case, you must not only pay tax on the profit from the sale, but also register a trade and pay taxes accordingly.
The three-object limit may be reached faster than you think. If you have a large piece of building land, for example, a real division into several building plots is worthwhile. If you now sell three building plots, the three-object limit is exceeded and you have to pay business tax (§15 EStG).
Example: Martin inherits a large fortune and invests in an apartment building in 2015. There are six separate apartments in the house. Because he is now building a house for himself and his family, Martin needs equity capital and sells three apartments in the apartment building.
Although he works as an employee, he must register as a trader: The three-property limit has been exceeded and he is legally a commercial real estate dealer.
Tip: If you own and sell three or more houses on a property as owner, this is not considered commercial trade.
4. This applies when inheriting and making gifts
In the event that you inherit a property and sell it after accepting the inheritance, the speculation period only applies under very specific circumstances.
Legally speaking, inheriting is not the same as acquiring. This means: Even if there are less than ten years between the inheritance and the sale, no speculation tax is due. The decisive factor is how long the property belonged to the decedent and whether it was used by him or her.
So you not only inherit the property, but also the speculation period attached to it. If the testator has used the house or apartment himself or has owned it for more than ten years, no speculation tax is due.
Example: Maria inherits a two-room apartment from her mother. The deceased had purchased the property in 2016. Maria is not sure whether she will have to pay speculation tax if she finds a buyer.
However, this concern is unfounded, since her mother used the property herself. The speculation period does not apply in Maria’s case, even though she has never lived in the apartment herself.
Tip: The three-object limit does not apply to inherited properties.
5. This applies to the sale of real estate
Basically, the same rules apply to the sale of a plot of land as to the sale of a property. So there is also a speculation period here and the three-object rule.
The only difference is that a property cannot be used by the decedent himself or herself. By use is meant here living. Even if you used the property as a garden, for example, it is not owner-occupied in the legal sense.
6. What happens in the event of losses
In times of sharply rising real estate prices, this is a rare case, but it can happen: You buy and sell a property that you do not use yourself within the speculation period and make a loss in the process. Because there is no profit, of course no speculation tax is due.
It is possible to claim this loss for tax purposes. According to the law (§23 EStG), however, you must have made profits from real estate transactions in the same calendar year against which the loss can be offset. The decisive factor is that it is actually profits from the sale of land, houses or apartments.
Example: Max sells a recently acquired condominium with a loss of 20.000 Euro. In the case of a single-family house that also belonged to him, he demonstrates more sales skill and makes a profit of 100.000 euros.
Because the loss arose from comparable transactions – this is referred to as private sales transactions with real estate – Max can offset the two amounts. So he only has to pay 80.000 euros speculation tax paid.
Tip: Detailed information on the three-object limit can be found in the Official Income Tax Handbook.