Usually not. This guide explains when foreign rental losses can and cannot reduce your German tax burden, how § 2a EStG applies, and what exceptions international property owners should know.
Many expats living in Germany own rental property abroad. While most discussions focus on the taxation of positive rental income, losses are equally common, particularly in the early years of ownership or during periods of renovation and vacancy.
A frequent question is whether foreign rental losses can reduce taxable income in Germany and generate a tax benefit.
The answer depends on German domestic tax law, the applicable double taxation agreement (DTA), and specific loss limitation provisions contained in the German Income Tax Act (EStG).
General Tax Treatment of Foreign Rental Income
If you are tax resident in Germany, you are generally subject to unlimited tax liability pursuant to § 1 (1) EStG. As a result, Germany taxes your worldwide income under the world income principle. Rental income from foreign real estate must therefore generally be considered when determining your German tax position.
For a detailed explanation of how Germany taxes foreign rental income, please see our related article: Rental Income from Foreign Real Estate While Living in Germany
Prinz.tax Practical Observation: The identification and measurement of foreign rental losses follow the same international tax principles but there are certain limitations relating to foreign losses.
Treatment of Foreign Rental Losses Under German Tax Law (§ 2a Abs. 1 Satz 1 Nr. 6 EStG)
German tax law restricts the offsetting of certain foreign losses against domestic income under § 2a EStG. Under § 2a Abs. 1 Satz 1 Nr. 6 EStG, negative income from the letting and leasing of foreign real estate is generally not allowed to offset other positive income.
Under this provision, losses from the letting and leasing of foreign immovable property cannot be offset against other types of income. Instead, the losses are usually carried forward within the § 2a EStG framework and may only be offset against future positive income derived from the same type of income, in this case: income from the letting and leasing of foreign immovable property.
The second hurdle is that the income and loss need to be from the same country. Negative rental income from the USA, for example, cannot be offset against positive rental income from France, let alone Germany.
However, such losses can generally be offset against future positive income from the same foreign rental activity. As a result, foreign rental losses usually do not provide an immediate tax benefit in Germany, even though they must be reported in the German tax return.
Prinz.tax Practical Observation: The German tax office will notify the taxpayer with a separate notification on loss carry-forwards of § 2a EStG losses.
Need Help with Foreign Rental Income or Losses?
Because the reporting of foreign rental income, consideration of applicable double taxation agreements and especially § 2a EStG can be complex, the deductibility of foreign rental losses should always be reviewed on a case-by-case basis.
At Prinz.tax, we help expats determine the correct treatment of foreign rental income and losses, prepare German tax returns, and ensure compliance with both German and international tax rules. Contact us if you need assistance with your foreign real estate situation.
