Sales tax

Sales tax (also known as value-added tax, or VAT for short) is a consumption tax levied on goods and services. In the real estate sector, sales tax is particularly relevant because transactions involving land and buildings are generally exempt from sales tax (Section 4(9) of the German Sales Tax Act (UStG)) - However, landlords and sellers may, under certain conditions, waive this tax exemption (optional solution), which can offer significant advantages in terms of input tax deduction. Proper VAT structuring for real estate transactions and rentals can result in liquidity and tax benefits amounting to hundreds of thousands of euros-or, if applied incorrectly, lead to substantial additional tax payments.

Principle of Tax Exemption and VAT Option

Residential property rentals are generally exempt from VAT in Germany (Section 4 No. 12 UStG)-the landlord cannot charge VAT and, in turn, has no right to deduct input tax on their input services (e.g., contractor costs, administrative fees, architect’s fees). This applies mandatorily to residential rentals - an option is excluded by law in this case.

When renting to businesses that use the property for purposes subject to sales tax (offices, commercial spaces, storage areas), the landlord may opt for sales tax under § 9 UStG. The landlord then charges 19% VAT on the rent and, in return, may claim the full input tax from construction and renovation costs. Prerequisite: The tenant is themselves a business subject to VAT and uses the space exclusively for output transactions subject to VAT.

Practical relevance of the option: For a new construction or extensive renovation with a construction volume of 1 million euros, the input tax included amounts to 190,000 euros-an amount that is immediately refunded by the tax office if the landlord has opted in. This liquidity advantage makes the option economically very attractive for larger investments.

VAT on Real Estate Sales

Real estate sales are also generally exempt from VAT (Section 4 No. 9a of the German VAT Act). However, under strict conditions set forth in Section 9 of the German VAT Act, a business seller may opt to charge VAT if the buyer is a business and uses the property for VAT-liable purposes. The buyer would then owe 19% VAT as the recipient of the service (for real estate transactions, the reverse charge mechanism applies under § 13b UStG: the buyer remits the tax to the tax office).

Input Tax Adjustment under Section 15a UStG: Anyone who has constructed a property under the VAT option and deducted input tax must repay a pro-rata portion of the input tax within the 10-year adjustment period in the event of a subsequent change in use (e.g., from commercial to residential use). For each year of the changed use, 1/10 of the input tax originally claimed must be repaid. In the case of large investments, this can lead to significant additional tax payments.

Sale of a Business as a Whole (Section 1(1a) UStG): If a landlord sells a fully leased property, including all lease agreements and the leasing history, the transaction may be treated as a non-taxable sale of a business as a whole (GiG)-in which case no sales tax is due, and the purchaser assumes the seller’s sales tax status. This arrangement is common practice for portfolio sales and larger commercial properties, but requires careful contract drafting.

Sales Tax on Construction Services and Photovoltaics

For general construction services, a 19% VAT rate applies; services provided by tradespeople to private clients are subject to the full VAT rate-the private property owner cannot deduct this input tax. However, under § 35a EStG, they may deduct 20% of the labor costs for tradespeople’s services (up to €1,200 annually) from their income tax.

Since January 1, 2023, a 0% VAT rate applies to the supply and installation of photovoltaic systems on residential buildings (Section 12(3) of the German VAT Act) - a significant cost reduction. This applies to both the system itself and to inverters, battery storage units, and wall boxes, provided they are installed in connection with the PV system. Operators of small PV systems can also take advantage of the small business exemption and are not required to pay sales tax.

Construction management services (architects, engineers): Subject to the full tax rate of 19%. For landlords who have opted in, the input tax on planning services is fully deductible.

Small Business Regulation and Real Estate Leasing

Landlords who generated less than 22,000 euros (from 2025: €25,000) in total revenue in the previous year and is expected to remain below €50,000 in the current year may take advantage of the small business exemption (Section 19 UStG): no sales tax on invoices, but also no input tax deduction. For landlords renting out residential properties without a commercial option, this is relevant if they provide ancillary services (e.g., parking space rentals, short-term rentals via platforms) that would generally be subject to tax.

Practical Tip for Property Owners in Nuremberg and Franconia

Anyone who owns or develops commercial real estate in Nuremberg-such as office space in Gostenhof, warehouses in the Nuremberg harbor, or retail properties in the city center-should clarify the issue of the VAT option early on with a tax advisor. A subsequent change in use (e.g., from commercial to residential use, triggered by changing market conditions or municipal regulations) can lead to an input tax adjustment under Section 15a of the German Value-Added Tax Act (UStG) and result in significant back taxes.

Particular caution is required with mixed-use buildings: If a building is used partly for commercial purposes (opted for) and partly for residential purposes (tax-exempt), input tax amounts must be allocated-based on the ratio of usable floor space or revenue. Errors in this allocation are a frequent cause for tax audits.

We work closely with specialized tax advisors in the Nuremberg region and, upon request, can connect you with competent contacts for VAT consulting regarding real estate investments.

Frequently Asked Questions

As a private landlord of an apartment, do I have to pay VAT?

No. The rental of residential space to private individuals is fundamentally and mandatorily exempt from sales tax-the option to opt into sales tax is legally excluded in this case (Section 9(2) of the German Sales Tax Act). You may neither add sales tax to the rent nor claim input tax on renovation costs. This applies regardless of whether you are a private individual or a business owner.

What is the advantage of the VAT option for commercial rentals?

If you undertake expensive renovations or new construction, the VAT option allows you to fully reclaim the 19% input tax on construction costs from the tax office. For a construction project worth €500,000, this represents a liquidity advantage of €95,000. Prerequisite: The tenant must be a business owner subject to sales tax and must use the space exclusively for taxable output transactions. Mixed use (e.g., a medical practice that also provides tax-exempt medical treatments) does not completely exclude the option, but requires a pro-rata calculation of the input tax deduction.

Is sales tax applicable when purchasing a condominium?

Generally, no. Private individuals generally purchase real estate VAT-free; real estate transfer tax (3.5% in Bavaria) applies to the total purchase price. Only if the seller is a business and the transaction was structured as subject to sales tax under Section 9 of the German Sales Tax Act (UStG) will 19% sales tax appear on the invoice. In that case, VAT and real estate transfer tax are mutually exclusive on the VAT-liable portion-no real estate transfer tax is levied on the net purchase price, nor is VAT itself. For private buyers, however, this scenario is virtually impossible.

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