Real estate investments are in demand even in times of crisis. They are widely regarded as crisis-proof and stable in value. But what is the best way for a private person to invest in real estate in Germany?
How an investment is best structured financially and fiscally always depends on the personal goals of the investor. In most cases, the following question will arise: Investment in private assets or in a corporate structure? What is often overlooked: A real estate foundation can also be an attractive structuring option.
The classic way: investment in private assets
Private assets are suitable in more classic examples of “buy and hold“. In this case, there are no start-up costs for a corporate structure and selling becomes tax-free after ten years. If the management of the property is handed over to a property management company, the owner will need less time for daily administrative work and have more time for important owner tasks such as market orientation, finances, tax strategy and bank financing.
In other respects too, the tax and accounting administrative expenses for a real estate investment in private assets are rather low. Rental income is taxed at the personal income tax rate. For our clients, this averages about 35 percent.
Often requested: the three-Gmbh model
Holding structures are also frequently sought after, in particular in the form of a real estate GmbH (German LLC) or a GmbH holding structure consisting of a GmbH that manages the participation in an asset-managing and a primarily commercial GmbH. This rather complex structure is interesting to ensure the exemption from trade tax for the rental income of the real estate GmbH. Establishment and structuring costs are higher both for the real estate GmbH as well as for the GmbH holding structure in relation to an investment in private assets. In addition, the significantly higher current expenses – compared to a private investment – are often ignored. For example, there is an obligation to draw up a balance sheet, various publication obligations, compulsory memberships (e.g. with the Chamber of Industry and Commerce) and a number of other obligations. In addition, there are higher compliance requirements and other formalities to be observed. A tax-free sale after ten years is not possible here. However, profits can be reinvested tax-neutrally if necessary.
A real estate corporation, however, also has an advantage that should not be underestimated: the rental income is taxed at the corporate tax rate of 15 percent. A real estate limited liability company can also effectively reinvest the undistributed profits, i.e. build up assets in a tax-efficient manner. It should be noted that dividends of the GmbH are to be taxed once again with 25 percent.
This structure is often interesting
- for investors whose personal tax rate already exceeds 35 percent
- if a quick sale of the property is intended or
- for high-yield properties, where
- no significant increase in value is to be expected,
- the rental income should be ploughed back as much as possible and
- investments are to be made in predominantly commercial real estate.
Sustainable: family asset pool
Yet another form of holding company is the asset-managing family pool, often in the form of an asset-managing private company. Essentially, the structure of an asset-managing private company is the same as an investment in private assets. Here too, a tax-free sale is possible after ten years.
The advantage of the family pool in comparison to private assets is that shares in the private company can be transferred to the following generations at an early stage with tax benefits and that influence on the assets can still be secured by contractual arrangements. The family asset pool also provides considerable protection against the fragmentation of assets.
Hidden-champion: real estate foundation
Real estate investment by means of a foundation, on the other hand, is a largely unknown concept. The foundation combines the advantages of a real estate investment in private assets, has the same advantages as a GmbH holding organization, but does not require a complex structure, and has significantly lower ongoing administrative expenses. This means that no balance sheet accounting is required and there are no publication obligations. In addition, a foundation is more effective than the classic family asset pool in intergenerational succession planning and “asset protection“.
The establishment costs for a real estate foundation are usually somewhat higher than for a “simple” corporate structure. However, the foundation more than pays off financially in the later stages.
Our experienced asset structuring lawyers will be happy to advise you on which option best suits your real estate investment in Germany.
Advice on protection and revenue optimization for real estate assets in Germany