Holiday properties - Taxes & Inheritance

From dream to real estate: Holiday properties have always been attractive, especially during times when holidays are becoming increasingly popular away from conventional hotel stays. However, it is important to keep an eye on costs despite all the enthusiasm. This begins with the incidental costs of the actual acquisition and can extend up to inheritance tax in case of inheritance.

In the following, we examine the costs that need to be taken into account for Germany, which may arise in case of acquisition of a property, on-going operations, for a sale, in case of a gift or in the event of inheritance.

Content overview

What costs do you incur when purchasing a holiday property?

The buyer of a property must initially bear the notary costs for the notarisation and execution of the property purchase contract. In addition, there are fees for the land register entries. Both the notary costs and the fees for the land register entries are based on the amount of the purchase price. For example, the notary costs amount to EUR 5,070.00, plus 19% VAT, and the land register costs EUR 7,600.00 for a purchase amounting to EUR 1.5 million. In the event that encumbrances must be replaced over the course of the property acquisition, further notary costs and land register fees will be incurred.

In addition to these costs, the buyer must pay the land transfer tax, which varies between 3.5% (Bavaria) and 6.5% (Schleswig-Holstein) depending on the federal state.

The notary costs, land register fees and the property transfer tax are incurred irrespective of whether it is a holiday property or any another property. The use as a private property or commercial property also does not play a role in the costs or the property transfer tax.

Although the land acquisition tax must regularly be borne by the buyer according to the property purchase contract, both the buyer and the seller are liable for payment as joint debtors according to the law.

In the event that a lawyer is commissioned to create a property purchase contract, the costs for his employment are also added. In Germany, however, the appointment of a lawyer to create a contract is rather unusual. The purchase contract is usually created by the notary and this activity is compensated by the notary costs. If a broker is commissioned with the brokerage, brokerage costs are added as further expenses. The brokerage costs generally amount to between 3.5 and 5.5% of the purchase price. As a general guide, when acquiring a property in Germany, depending on whether a broker is involved, incidental costs in the amount of 5 to 10% of the purchase price must be expected.

What operating costs need to be paid by the owner of a holiday property?

Especially in the case of a holiday property, second flat tax is incurred as current costs, in different amounts and depending on the federal state.

In addition, the current costs that each property owner incurs must be taken into account: The general operating costs for gas, water, electricity, waste, waste water, property tax, insurance, etc. must be mentioned here; if it is a condominium, the costs of property management must also be taken into account. Additional costs depend on whether the property is rented to holiday guests for short stays, for example. If this is the case, recurring renovation costs must be expected at shorter intervals.

What costs are incurred when selling a holiday property?

Which taxes are incurred by the seller in the sale of a holiday property in Germany initially depends on whether the holiday property concerns private assets or business assets and also on whether the seller holds the property as a private person or via a property-holding company. If the property is held in private assets, the sale is generally tax-exempt if there is no speculative transaction involved. Such a transaction must be assumed if the acquisition and sale take place within a period of 10 years. Then the difference between the acquisition costs and the sales price must be subjected to personal income tax. The tax rate depends on the specific personal circumstances of the seller.

If the seller holds the property in the business assets or if he acquires and sells more than three properties within a certain period of time, so that the tax authorities assume commercial property trading, the difference between acquisition costs and sales proceeds is always subject to personal income tax without a holding period being decisive.

It should also be noted that the seller is obliged to hand over a valid energy certificate to the buyer. A breach of this obligation is sanctioned with a fine.

What costs apply when making a lifetime gift?

In Germany, the amount of the gift tax is based on the degree of kinship between the donor and the recipient. The closer the relationship is, the lower the tax rates will be. There is an exemption of EUR 500,000.00 between spouses; the exemption between parent and child amounts to EUR 400,000.00 each. The allowances are newly granted every 10 years, which opens up potential for structuring the transaction.

In the case of real estate donations, notary costs and land register fees must be taken into account in addition to the gift tax. A notarial gift agreement is mandatory. The costs are based on the value of the property transferred by donation. With a value of EUR 1.5 million, the notary costs and land register fees are the same as with a sale.

What costs are incurred in the event of inheritance?

With regard to the gift or inheritance tax, it doesn’t matter whether a property in Germany is given as a gift or inherited by way of anticipated succession plays a role. Both the tax rates and the allowances apply to the same extent regardless of whether they are given as gifts or inherited.

An example should show design options at this point:

If the spouses F and M acquired a holiday property ideally for half of EUR 2 million each in 2020, have two children, K1 and K2 and the F 2023 dies without a testamentary disposition, i.e. the statutory succession applies, the following applies:

Estate of EUR 1 million M inherits EUR 500,000.00 minus exemption amount of EUR 500,000.00, ErbSt (inheritance tax) = 0; K1 and K2 inherit EUR 250,000 minus exemption amount of EUR 400,000.00, ErbSt = 0.

If the F had acquired the property as sole property, the following tax burden would result:

Estate of EUR 2 million M inherits EUR 1 million minus the allowance of EUR 500,000.00 remaining EUR 500,000.00 x 15% = EUR 75,000.00 for M. K1 and K2 each inherit EUR 500,000.00 less the allowance of 400,000.00 each remaining for K1 and K2 100,000.00 x 11% = EUR 11,000.00 each, i.e. there is a total tax burden of EUR 97,000.00. The example should clarify that with regard to the avoidance/minimisation of the gift, there is considerable room for manoeuvre for the inheritance tax burden. In this case, possible tax consequences in the event of inheritance should have been considered even at the time of acquisition.

Autor: Dr. Axel Berninger