Deferred taxes

Deferred taxes are tax liabilities or tax assets that have already arisen economically but will not be recognized for tax purposes until future periods. In the real estate context, deferred taxes primarily arise for corporations (GmbH, AG) that hold real estate on their balance sheets and distinguish between commercial and tax book values. For private owners, deferred taxes are indirectly relevant-for example, if the property is sold within the capital gains tax period and deferred capital gains are then recognized for tax purposes.

Deferred Taxes in Real Estate Companies

If a real estate GmbH holds a building that has increased in value, a hidden reserve arises: the market value exceeds the book value. If this hidden reserve is not realized (no sale), no current tax liability arises. Nevertheless, the company must recognize deferred taxes as a liability under the German Commercial Code (HGB, Section 274) and IFRS (IAS 12)-as a future obligation to the tax authorities. These deferred tax liabilities reduce the equity reported on the balance sheet.

Conversely, deferred tax assets arise when higher losses are reported in the tax balance sheet than in the commercial balance sheet-e.g., due to accelerated tax depreciation. For real estate companies, this situation frequently arises from declining-balance depreciation or special depreciation under § 7b of the German Income Tax Act (EStG), which allow for higher tax deductions than the straight-line depreciation required under commercial law.

Deferred Taxes for Private Real Estate Owners: The Speculation Tax

Private owners do not pay deferred taxes in the accounting sense. However, the concept is relevant by analogy:

• If the property increases in value, this appreciation is initially not taxable
• A sale within the speculation period (ten years for real estate) makes the profit taxable (Section 23 of the German Income Tax Act (EStG))
• Sale after the ten-year period has expired: tax-free for private individuals

The “tax authority’s deferred tax claim” during the speculation period must be taken into account in the investment calculation: When purchasing for resale, an exit before the ten-year period expires only makes sense if the net profit after tax is still attractive. With a personal income tax rate of 42% and a capital gain of 200,000 euros, approximately 84,000 euros in taxes are incurred-an amount that significantly reduces what might otherwise be an attractive profit. Anyone acquiring real estate as a medium-term investment should consistently plan for the ten-year speculation period as a minimum holding period.

Deferred Taxes in Real Estate Valuation and Due Diligence

Deferred taxes play a central role in the valuation of real estate companies (share deal vs. asset deal):

• Share Deal: The buyer acquires shares in the company. They assume all deferred tax liabilities. A discount for deferred taxes must be negotiated into the purchase price
• Asset Deal: The buyer acquires the property directly. The company’s deferred taxes remain with the seller

In the due diligence of corporate transactions involving real estate assets, the correct identification and valuation of deferred taxes is therefore one of the tax advisor’s key tasks. Errors at this stage can significantly distort the purchase price and post-merger financial planning.

Deferred Taxes in the Context of Conversions and Restructuring

Anyone who contributes a rented property-previously held as part of their private assets-to a limited liability company (GmbH) may, under certain conditions, carry forward the book values from the tax balance sheet-in which case no deferred taxes arise from the contribution. If the transfer is not tax-neutral (for example, because a business is not being transferred, but only a single property), the hidden reserves are realized and taxed immediately. This issue is prone to errors in practice and requires specialized tax guidance, particularly when real estate transfer tax issues (Section 1 GrEStG) are linked to the conversion.

Practical Tip for Property Owners in Nuremberg and Franconia

Anyone in the Nuremberg region who holds real estate through a GmbH-such as an asset management company-should ensure that deferred taxes are correctly reported in the annual financial statements. This is not only an accounting requirement but also relevant if shares in the GmbH are to be sold: Potential buyers will carefully examine the amount of deferred tax liabilities during due diligence. In the Nuremberg metropolitan region, there are several tax consulting firms specializing in real estate companies that are proficient in both the tax and commercial accounting of real estate GmbHs. We recommend involving a specialized tax advisor as early as the formation of a real estate GmbH to avoid surprises later on when selling shares.

Frequently Asked Questions

As a private landlord, do I have to account for deferred taxes?

No. For private individuals who are not required to prepare financial statements, there is no obligation to account for deferred taxes. However, the conceptually similar issue (future tax liability upon sale within the speculation period) must be taken into account in investment calculations. Anyone who owns multiple properties should keep an eye on the “ten-year calendar” for each property.

How high are deferred taxes for a real estate GmbH?

The deferred tax rate corresponds to the expected effective corporate tax rate upon realization-in Germany, typically around 30% for GmbHs (corporate income tax + solidarity surcharge + trade tax). For a capital gain of €500,000, deferred taxes of approximately €150,000 would therefore be recognized. When negotiating a share deal, this amount serves as the starting point for price reduction negotiations.

Can I avoid deferred taxes?

It is virtually impossible to completely avoid the tax realization of deferred reserves, but there are structuring options: utilizing restructuring privileges (UmwStG), tax-neutral mergers, or selling after the holding period has expired can optimize the tax burden. For private real estate, the simplest approach is to bridge the ten-year holding period-individual tax advice is essential here.

How do deferred taxes affect the purchase price in a share deal?

In a share deal, the purchase price is often determined based on the company’s net asset value (NAV). In this context, deferred taxes-i.e., the future tax burden upon the sale of the held properties-are taken into account as a deduction. The greater the difference between book value and market value, the larger the discount. Buyers can use this discount as a bargaining chip.

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