Differential taxation

Differential Taxation - Differential taxation is a special VAT procedure under Section 25a of the German Value-Added Tax Act (UStG), under which VAT is levied not on the full sales price, but only on the difference between the purchase price and the sales price (margin). In the real estate sector, differential taxation is particularly relevant in the commercial trade of used goods (e.g., built-in kitchens, furniture) as well as in certain real estate transactions where the previous owner did not report sales tax.

How It Works and Requirements

Differential taxation applies under the following conditions:

• The seller is a commercial reseller (business operator as defined by the UStG)
• The item was purchased from a private individual or a small business owner (i.e., without input tax deduction at the time of purchase)
• The seller did not deduct input tax at the time of purchase

Value-added tax is then calculated exclusively on the markup (selling price minus purchase price). A separate value-added tax line item on the invoice is not permitted-the buyer therefore cannot claim an input tax deduction.

Relevance in Real Estate Transactions

In real estate transactions, margin taxation plays a minor but relevant role:

• Real estate sales by commercial dealers: If a property is purchased from a private individual and resold, margin taxation may be applied-sales tax is levied only on the profit
• Inventory and furnishings: When purchasing used real estate with a built-in kitchen, furniture, or technical equipment, the commercial dealer may apply differential taxation to these items
• Option for standard taxation: The business owner may waive margin taxation and opt for standard taxation (Section 25a(8) UStG)-advisable if the buyer is entitled to input tax deduction

Margin Taxation vs. Standard Taxation - Comparison for Commercial Real Estate Dealers

Criterion	Margin taxation (Section 25a UStG)	Standard taxation (Section 1 UStG)
Tax base	Trade margin (sale - purchase)	Full sales price
Input tax deduction on purchase	Not possible	Possible (provided VAT is shown)
Input tax deduction for the buyer	Not possible (no VAT shown)	Possible (B2B)
Appropriate when	Purchase from a private individual (no input tax deduction)	Purchase from a business with VAT
Application to real estate	Only possible for commercial dealers	Option under § 9 UStG (B2B, commercial)
Example	Dealer purchases a condominium from a private individual, sells it at a markup	Commercial real estate transaction between two businesses

Three-Property Threshold and Commercial Real Estate Trading

For private individuals who regularly buy and sell real estate, the three-property threshold is of particular importance. The tax authorities and the Federal Fiscal Court (BFH) assume that anyone who sells more than three properties within five years qualifies as a commercial real estate dealer-with the result that the profits are no longer taxed as private capital gains (§ 23 EStG), but as commercial income. In this case, VAT liability also becomes relevant, and differential taxation may apply. The exact distinction is complex and requires tax advice.

Practical Tip for Property Owners in Nuremberg and Franconia

For private real estate sellers in the Nuremberg metropolitan region, differential taxation is generally not directly relevant, as private sales are fundamentally exempt from value-added tax under § 4 No. 9a UStG. However, caution is advised if you trade in real estate commercially (note the three-property limit) or if inventory sold with the property (built-in kitchen, awning, sauna, garden) is valued and reported separately. We recommend always consulting a tax advisor for mixed sales to ensure optimal tax planning and avoid unintended VAT liabilities. Early tax planning is essential when purchasing and reselling multiple properties within a short period of time.

Frequently Asked Questions

Does the margin taxation apply to the sale of my private property?

No - private property sales are generally not subject to sales tax (Section 4 No. 9a UStG). Margin taxation applies only to commercial resellers. However, you should check whether your sale still qualifies as a private transaction: Anyone who sells more than three properties within five years may be classified as a commercial real estate dealer. In this case, the profit is taxed as commercial income, sales tax may apply, and the margin scheme may be applicable.

How is differential taxation applied to fixtures and fittings in real estate purchases?

If a commercial dealer purchases a property with fixtures and fittings (built-in kitchen, furniture) from a private individual and resells it, they may apply differential taxation to the fixtures and fittings. Value-added tax is then levied only on the margin (selling price of the inventory minus the purchase price of the inventory). The land itself is treated separately-either as VAT-exempt (Section 4 No. 9a of the German Value-Added Tax Act) or with the option to apply VAT under Section 9 of the German Value-Added Tax Act, if the buyer is a business entity entitled to deduct input tax.

As a buyer, can I claim an input tax credit if the seller applies differential taxation?

No - under differential taxation, the sales tax must not be shown separately on the invoice. The buyer is therefore not entitled to an input tax deduction, even if they are a business owner themselves. If you, as a commercial buyer, need the input tax deduction-for example, because you intend to use the property or inventory in a manner subject to sales tax-you should discuss the option for standard taxation with the seller. This is possible if the requirements of § 9 UStG are met.

Practical Relevance in Nuremberg Real Estate Transactions

In the Nuremberg metropolitan region, differential taxation primarily affects commercial dealers who purchase existing properties from private individuals and resell them after renovation (so-called “fix-and-flip” strategies). These market participants often acquire condominiums or townhouses in need of renovation in Nuremberg neighborhoods such as Langwasser, Schoppershof, or Mögeldorf, invest 30,000 to 80,000 euros in renovation and refurbishment, and then resell them at a markup.

For these players, the correct tax classification is crucial: If differential taxation is applied, sales tax is levied only on the trading margin-a significant advantage if the purchase was made by a sales-tax-exempt private individual and the renovation costs were not fully eligible for input tax deduction. If, on the other hand, a substantial portion of the purchase price is attributable to fixtures or fittings, the purchase contract and invoice should clearly distinguish between the various components of the supply: Land/building (VAT-exempt under Section 4 No. 9a of the German VAT Act) and fixtures and fittings (potentially subject to differential taxation). In these scenarios, consultation with a tax advisor specializing in commercial real estate transactions is essential.

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