The rental of real estate in Germany remains tax-relevant even after emigration. In particular, the change of residence often changes tax liability, which directly affects the taxation of rental income and possible capital gains. In this article, we explain the most important aspects of the taxation of rental income after emigration, the change from unlimited to limited tax liability, and the peculiarities in countries such as the United Arab Emirates and Spain. Finally, we clarify the question of when the sale of a property remains tax-free.

I. Basics of Taxation of Rental Income

Rental income, according to German tax law, falls under income from rental and leasing as defined by § 21 EStG. The income from rental and leasing is calculated as the surplus of income over advertising costs.

The following belong to income from rental and leasing:

• Rental income (cold rent)

• Operating costs and additional expenses that are not paid directly by the tenant

• Payments for additional services such as parking spaces or furnishing

On the other hand, advertising costs include all expenses that are directly related to the rental. Typical advertising costs include:

• Interest on real estate financing

• Depreciation on the building (2% to 3% of the purchase price of the property, excluding the land value)

• Costs for repairs and maintenance

• Administrative costs, e.g., for property management or tax consulting

The surplus is taxable in Germany. This applies even if the property owner moves their residence abroad - however, the tax rules change with the move.

II. Change from Unlimited to Limited Tax Liability

Anyone with a residence or habitual abode in Germany is generally subject to unlimited tax liability. This means that all domestic and foreign income is subject to German taxation according to the worldwide income principle.

When moving abroad, there is a change to limited tax liability in Germany, provided that no residence or habitual abode remains in Germany. In this case, only domestic income as defined by § 49 EStG, such as rental income from German properties, is subject to German income tax.

Example

Mr. Schmidt owns an apartment building in Germany and moves his residence to Dubai. Since he no longer has a residence in Germany, he is subject to limited tax liability. His rental income from the German property continues to be subject to German taxation.

Effects of Limited Tax Liability

Under limited tax liability, for instance, the basic tax allowance cannot be claimed. Surpluses are thus taxed from the first euro. All special regulations are listed in § 50 Abs. 1 EStG.

III. Tax Particularities for Residents Abroad

Relocation to Dubai (UAE) - Taxation Without Double Taxation Agreement (DTA)

There is no double taxation agreement (DTA) between the UAE and Germany. This means that the income earned in Germany remains fully taxable, without any relief from double taxation. As the United Arab Emirates does not impose income tax on natural persons, there is no double taxation or any other disadvantages for property owners.

Example

Ms. Müller owns an apartment in Germany and has emigrated to Dubai. The surplus amounting to 24,000 euros per year is subject to German taxation, as she is treated as limited tax liability. Since there is no double taxation agreement between Germany and the UAE, only German tax is levied, while Ms. Müller does not have to pay any further taxes on this income in the UAE.

Relocation to Barcelona (Spain) Taxation With Double Taxation Agreement (DTA)

There is a double taxation agreement between Spain and Germany. The double taxation agreement specifies which state has the right to tax certain income. For income from rental and leasing of properties located in Germany, the DTA generally provides that Germany has the right to tax. Nevertheless, the taxpayer must declare the rental income in Spain. However, Spain credits the German tax against the rental income (credit method). There is, however, also the exemption method, where the income in Germany is exempt from taxation but subject to progression reservation.

Example

Mr. Becker moves to Spain and rents out his single-family house in Germany. According to the double taxation agreement between Germany and Spain, Mr. Becker must declare the rental income in both countries. In Germany, tax is levied directly on the rental income, while Spain credits the German tax and does not impose additional tax.

IV. Tax Treatment of Property Sales After Moving

The sale of a property located in Germany may be taxable or tax-free, depending on the holding period and use of the property. According to § 23 EStG, a taxable private sale occurs if less than 10 years elapse between acquisition and sale. In the event of a sale within this 10-year period, the profit is taxable in Germany.

Tax-Free Sale

• The property was sold after the expiry of the 10-year period, regardless of whether it was rented out or used personally.

• The property was used exclusively for personal residential purposes

• The property was rented for five years and used for personal purposes within the last three years

  
  

Taxable Sale

• The property was sold within the 10-year period and was exclusively rented out.

• The property was used personally for eight years and rented out in the last year

  
  

Conclusion

The taxation of income from rental and leasing after moving requires a careful examination of the tax situation, especially the tax residency and the tax regulations of the country of relocation. Upon moving from Germany, the taxation of rental income from domestic properties in Germany continues, regardless of whether a double taxation agreement exists or not. Special attention must be paid to the tax treatment of property sales, especially for sales within the 10-year period.

If you would like to learn more about your tax obligations after emigration or need assistance in optimizing your tax burden, we are available to help you as experts in international tax law. Contact us to discuss your individual situation and receive tailored advice.

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