Investment tax

Investment Tax refers to the tax treatment of income from investment funds-particularly real estate funds-under the Investment Tax Act (InvStG). Since the fundamental reform of the InvStG on January 1, 2018, real estate investment funds (both open-ended and closed-end) have largely been taxed at the fund level, while investors pay additional capital gains tax on their distributions and capital gains. In contrast, the InvStG does not apply to direct investors in individual properties-they are subject to regular income tax law (Sections 21, 23 EStG).

The Investment Tax Act (InvStG) and Its Significance for Real Estate Funds

The InvStG, in effect since 2018, distinguishes between three types of funds with different tax treatments:

Investment Funds (UCITS/AIFs): Since 2018, open-ended public real estate funds have been paying corporate income tax themselves on domestic real estate income (rental income, gains from real estate sales). The tax rate at the fund level is 15% (corporate income tax plus solidarity surcharge). Investors receive a so-called partial exemption: For German real estate funds with a domestic focus, 60% of the income is tax-exempt for the investor’s personal income tax. This mitigates double taxation.

Special Investment Funds: These are aimed at institutional investors (e.g., pension funds, insurance companies). Under certain conditions, they may opt for so-called transparent taxation, whereby the tax is not levied at the fund level but directly on the investor. This allows institutional investors to optimally manage their tax situation.

Closed-End Real Estate Funds: For tax purposes, these are generally treated as partnerships (KG structure). Income is directly attributed to the partners and taxed as part of their personal income tax (§ 21 EStG) or business income (§ 15 EStG). Losses may-within strict legal limits-be offset against other positive income.

Advance Flat Rate as a Tax Component

A central element of the InvStG 2018 is the advance flat rate: It ensures that investors pay tax on a minimum amount annually, even in the case of reinvesting funds (which make no or few distributions). This is intended to prevent investors from permanently deferring tax payments through reinvesting funds.

The calculation is based on the Bundesbank’s base interest rate, the fund’s value at the beginning of the year, and a factor of 70%. In the event of zero or negative interest rates (as in 2021/2022), the advance lump sum was correspondingly low or zero; as interest rates rise, it increases again and can lead to unexpected tax payments for fund investors, even though no distributions were made. The custodian bank automatically withholds capital gains tax on the advance lump sum.

Investment Tax vs. Direct Real Estate Investment

Many investors in the Nuremberg metropolitan region wonder whether a direct investment in a condominium or an investment in an open-ended real estate fund is more tax-advantageous:

Criterion	Direct Investment	Open-Ended Real Estate Fund
Type of tax on income	Income tax (§ 21 EStG)	Capital gains tax 25% (after partial exemption)
Depreciation (AfA) allowed	Yes	No
Speculation period	10 years (Section 23 EStG)	None (capital gains tax applies immediately)
Loss carryforward	Limited	Losses may only be offset against fund gains
Capital investment	High (purchase price + ancillary costs)	Low (starting from small amounts)
Diversification	Low (single property)	High (many properties)

Direct real estate investment is particularly attractive from a tax perspective for investors with a high marginal tax rate who can use depreciation and income-related expenses to offset taxes, and who aim for a holding period of over 10 years to realize tax-free capital gains. In contrast, real estate funds offer broad diversification, professional management, and a low entry threshold, but offer less flexibility in terms of tax planning.

Practical Tax Optimization for Real Estate Funds

Investors who hold real estate funds in their portfolio should be aware of the following tax considerations: The tax exemption order (up to 1,000 euros in tax-free investment income per person annually) also applies to fund distributions and the advance lump-sum allowance. In the case of losses from fund investments, loss offsetting is only possible against gains from other capital market investments-not against income from renting and leasing. Church tax on fund income must be claimed separately if the custodian bank does not automatically withhold it.

Practical Tip for Property Owners in Nuremberg and Franconia

Anyone in Nuremberg or Franconia considering whether a direct real estate purchase or an investment in a real estate fund is more attractive should take the tax implications into account alongside expected returns. Direct investors benefit from depreciation deductions, can claim maintenance costs as business expenses, and are subject to income tax on capital gains only after a ten-year holding period. Given the achievable purchase prices in the greater Nuremberg area, direct investment with the appropriate equity investment is often more tax-efficient. We recommend making this decision together with a tax advisor and our market team.

Frequently Asked Questions

What is the difference between investment tax and regular capital gains tax?

The regular capital gains tax (25% plus Soli/KiSt) applies to interest, dividends, and capital gains from individual securities. The investment tax under the Investment Tax Act (InvStG) additionally regulates pre-taxation at the fund level and the resulting partial exemptions for investors to avoid double taxation.

As a fund investor, do I benefit from the real estate transfer tax exemption?

No, not directly. Open-ended public real estate funds are generally subject to real estate transfer tax when purchasing real estate. In Bavaria, this amounts to 3.5% of the purchase price. The fund bears these costs internally; they are reflected in the fund’s performance.

How does the partial exemption for open-ended real estate funds work in practice?

For an open-ended real estate fund with a domestic focus, 60% of distributions and 60% of the advance lump sum are tax-exempt. This means: Of a €1,000 distribution, only €400 is taxed at the personal tax rate (or 25% capital gains tax). For a German real estate fund with a foreign real estate focus, the partial exemption is as high as 80%.

Can I offset losses from real estate funds against rental income?

No. According to Section 20(6) of the German Income Tax Act (EStG), losses from capital assets (including fund losses) can only be offset against gains from capital assets, not against income from renting and leasing. This is a significant tax disadvantage of the fund compared to direct investment, where losses (within certain limits) can be offset more broadly.

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