Rental Income from Foreign Real Estate While Living in Germany 

What You Need to Know to Stay Compliant and Avoid Double Taxation 

Many of our clients own property abroad and earn rental income from it and wonder what the income tax in Germany is on foreign property. If you are a tax resident in Germany, renting out foreign real estate creates a complex tax situation that involves multiple jurisdictions. Additional questions arise if the property is sold at a profit. Some expats are not aware of the worldwide income principle that applies to German tax residents. 

Therefore, proper analysis and coordination are required to avoid double taxation, reporting errors, and unnecessary tax risks. 

In this article, we explain how rental income from foreign property is taxed when you are a German tax resident. We also explain common pitfalls that we observe when advising new clients who are not aware of German tax regulations for income from foreign real estate. 

Tax Residency in Germany and Consequences 

Your tax obligations in Germany as an expat start with your tax residency status. You are considered a German tax resident if you have: 

• A permanent home (“Wohnsitz”) in Germany, or  

• Your habitual abode (“gewöhnlicher Aufenthalt”) in Germany  

As a consequence, you are subject to unlimited tax liability in Germany. This means Germany taxes your worldwide income, including rental income from foreign real estate. Even if the property is located abroad, the income must typically be declared in your German income tax return. Having made transparent the basic requirement, we will next touch on how you will meet your reporting obligations in Germany and avoid double taxation. 

Prinz.tax Key Takeaway: Tax residency means that a person is considered subject to unlimited tax liability in Germany because they have a permanent home or habitual abode in Germany, resulting in taxation of their worldwide income. 

Determination of Rental Income under German Tax Rules 

How is rental income determined under German tax rules if the property is located abroad? Many of our clients are confused because it is not sufficient to simply take the figures from your foreign tax return. 

Instead, the rental income must be recalculated in accordance with German tax rules. This means applying German tax rules to all income and expenses associated with the property and converting all amounts into EUR using exchange rates accepted by the German tax authorities. Purely using the net income from your foreign income tax return may be inaccurate and poses a tax compliance risk. 

In our experience, we often observe differences between the German and foreign tax systems, for example: 

As a result, the taxable income under German rules can be materially different from the foreign tax result. 

Tax Treaties and Their Effect (Progression Clause) 

Most cross-border cases are governed by Double Taxation Agreements (DTAs). Typically, these treaties provide that rental income is taxed in the country where the property is located. This is intended to avoid double taxation. In such cases, Germany applies the exemption method with progression (“Progressionsvorbehalt”) under § 32b EStG. This means that the foreign rental income is exempt from German taxation, but it is included to determine your applicable tax rate. Effectively, this can lead to a higher tax rate on your German-source income, even though the foreign income itself is not taxed again. 

Can negative income from foreign real estate be used as an offset against other income to lower your taxes on your German-source income? Unfortunately, it cannot! Under § 2a EStG, certain foreign losses (including from foreign real estate in specific cases) may be subject to restrictions on offsetting against other income, which can limit immediate tax benefits and result in loss carryforward. 

Prinz.tax Key Takeaway: Progression clause means that certain foreign income is exempt from German taxation under a tax treaty but is still taken into account when determining the applicable tax rate for the taxpayer’s other taxable income in Germany. To ensure tax compliance and avoid double taxation, the foreign rental income must be declared in Germany, and it must be calculated according to German tax rules. 

Quantifying the Effect of the Progression Clause for Foreign Rental Income 

Many clients want to calculate the effect that foreign rental income has on their income taxes in Germany. This effect is highly individual and depends on your total income structure, marital status, and other income sources. 

To better understand and quantify this impact, we recommend using our Prinz.tax Income Tax Simulator for Expats. It allows you to model your personal tax situation and directly compare different scenarios, including the effect of foreign rental income under the progression clause. 

You can access the simulator here: 
https://prinz.tax/german-income-tax-simulator-for-expats/ 

When using the simulator, foreign rental income should be included in the section “Foreign income subject to progression clause / Foreign income exempt under a tax treaty”. This ensures that the progression effect is correctly reflected in your overall tax calculation and provides a realistic estimate of your effective German tax rate. 

Special Provisions for Rental Income from Property Located within the EU/EEA 

Many expats with real estate investments in other European countries are not aware that a special rule exists for rental income from real estate located within the EU/EEA. Under § 32b Abs. 1 Satz 2 Nr. 3 EStG, rental income from immovable property situated in another EU/EEA member state is usually excluded from the progression clause. This provision reflects EU law considerations, in particular the avoidance of discrimination and restrictions on the free movement of capital. It leads to a more favorable treatment compared to rental income from real estate located outside the EU/EEA. 

Prinz.tax Recommendation: This means that, unlike typical treaty-exempt foreign income, this rental income is neither taxed in Germany nor taken into account for determining the applicable tax rate. As a result, the foreign rental income from EU/EEA property often has no impact (depending on treaty classification) on the German tax rate applied to other income, effectively preventing an indirect tax increase through progression. From a German tax perspective, rental properties in EU/EEA countries are privileged in many cases over other non-EU countries. 

Are There Tax Relief Mechanisms if No Tax Treaty Exists? 

Sometimes our clients from countries with no tax treaty with Germany (e.g. Brazil, Paraguay, or Bahamas) ask us what they need to do to avoid double taxation. If no tax treaty applies, Germany provides unilateral relief to avoid double taxation in two distinct forms: 

a) Foreign Tax Credit (§ 34c EStG) 

Usually, foreign income tax is credited against German income tax if certain conditions are met. The foreign tax credit is limited to the portion of German income tax attributable to the foreign income. In our experience, this is generally the preferred method. 

b) Deduction of Foreign Taxes as Expenses (§ 9 EStG) 

Alternatively, foreign taxes can be treated as deductible expenses. This reduces the taxable income in Germany and indirectly the German income tax on foreign rental income. This option is usually less favorable but may be relevant in specific cases, especially when the criteria for a foreign tax credit are not met. 

Significant Tax Risk: Sale of Foreign Real Estate 

We sometimes receive requests from expats living in Germany who have sold their foreign real estate and wonder how this should be treated under German tax law. The taxation of capital gains from foreign real estate is particularly complex because we observe key differences between German and foreign tax law. 

German Tax Treatment 

Under German tax law (§ 23 Abs. 1 S. 1 Nr. 1 EStG), gains from the sale of real estate are taxable if the sale occurs within 10 years of acquisition (“Spekulationsfrist”). The same exemption applies if the property was used exclusively for own residential purposes, or at least in the year of sale and the two preceding years. If the sale occurs after the 10-year holding period, the gain is generally not taxable under German private disposal rules. In this case, a gain on sale may be taxable in the country where the property is located but does not have to be reported in the German income tax return. 

Interaction with Foreign Tax Rules 

Many countries provide tax exemptions for the sale of a primary residence. Such exemptions are often limited by amount or value of the property but may not require a tax-advantaged minimum holding period. This can create a mismatch, as the following example illustrates. 

Example: U.S. Family Home 

Under U.S. tax law, a married couple may exclude up to USD 500,000 of capital gains on the sale of their primary residence. Consequently, there would be no taxable gain from a U.S. perspective. 

However, from a German tax perspective, German tax rules need to be applied independently. If the German exemption conditions are not met, the gain may be fully taxable under German tax rules. 

Potential Tax Pitfall: This is a typical example of unintended asymmetrical taxation. 

Conclusion 

If you live in Germany and rent out property abroad, you need to carefully coordinate between German tax law, foreign tax systems, and applicable tax treaties. In this article, we have analyzed the implications of both rental income and gains from the sale of real estate. The key takeaways for expats living in Germany owning real estate abroad are: 

Need Support with Your Cross-Border Rental Income? 

If you own property abroad and live in Germany, we are happy to support you with a coordinated, cross-border tax approach tailored to your situation.