Capital gain

Capital gain - The capital gain on real estate is the difference between the sale price and the acquisition cost (purchase price plus incidental costs, minus any depreciation claimed). For private real estate sales within the 10-year speculation period (Section 23 of the Income Tax Act), the gain is subject to income tax; after the period expires, it is tax-free. For business real estate, the capital gain is generally taxable, regardless of the holding period.

Calculation of the Capital Gain

The capital gain is calculated as follows: Sale price minus acquisition costs (purchase price + real estate transfer tax + notary fees + real estate agent fees) minus subsequent construction costs (renovation, additions) plus depreciation claimed (for rented properties, depreciation increases the profit) minus selling expenses (broker fees upon sale, prepayment penalty). Example: Purchase in 2016 for 300,000 euros (including ancillary costs: 325,000 euros), sale in 2026 for 450,000 euros, depreciation over 10 years: 50,000 euros, selling expenses: 15,000 euros. Profit: 450,000 − 325,000 + 50,000 − 15,000 = 160,000 euros.

The addition of the depreciation claimed surprises many owners: Anyone who has depreciated a rented apartment at 2% annually over the years must, in a sense, give back this tax savings upon sale-because it increases the taxable capital gain. For a €300,000 apartment with 20 years of depreciation, this means an addition of €120,000 (2% × 300,000 × 20). This calculation is a major reason why the actual tax burden upon sale is often higher than owners expect.

Speculation Period and Tax Exemption

For privately held real estate (rental or owner-occupied), Section 23 of the Income Tax Act (EStG) applies: The capital gain is tax-exempt if more than 10 years have elapsed between acquisition and sale. There is an exception for owner-occupied properties: If the property was used exclusively for personal residential purposes in the year of sale and the two preceding calendar years, the profit is tax-exempt even within the 10-year period. If more than 3 properties are sold within 5 years, there is a risk of being classified as commercial real estate trading-in which case the entire profit is subject to business tax.

Particularly tricky: The three-property limit applies not only to the purchase and sale of real estate but also to the development of land or the division into condominiums and subsequent sale. Anyone who regularly buys, renovates, and sells real estate-even if they do not act as a business operator in the process-can quickly slip into commercial real estate trading. The tax consequences are significant: In addition to income tax, trade tax is also due.

Practical Tip for Property Owners in Nuremberg

We recommend that property owners in the Nuremberg metropolitan area who are considering a sale within the 10-year period have their tax burden calculated in advance. With a top tax rate of 42% and a capital gain of 150,000 euros, you could face approximately 63,000 euros in income tax plus the solidarity surcharge.

In many cases, it’s worth postponing the sale by a few months to meet the 10-year period. Note: The date of the notarized purchase agreement is decisive, not the land registry entry. Consult a tax advisor, especially if you are selling multiple properties in a short period of time-the three-property limit can be reached quickly. We work with experienced tax advisors in the metropolitan area and can connect you with the right contact upon request.

Frequently Asked Questions

When does the 10-year period begin?

The period begins on the date of the notarized purchase agreement at the time of acquisition and ends on the date of the notarized purchase agreement at the time of sale. The land registry entry, transfer of ownership, or payment of the purchase price are not relevant. In the case of inheritances, the decedent’s holding period is taken into account-if the decedent purchased the property more than 10 years ago, the heir can sell it immediately tax-free. In the case of gifts, however, the period starts anew on the date of the gift.

Do I have to report the capital gain on my tax return?

Within the 10-year period: yes, in Schedule SO (Other Income). Even if you believe a tax exemption applies (e.g., owner-occupancy), you should report the transaction-the tax office will verify the requirements. After the 10-year period has expired: A tax-exempt capital gain generally does not need to be reported, but it is advisable to keep the documents (purchase agreement, proof of acquisition costs) for at least 10 years.

How is the capital gain calculated for inherited real estate?

With inherited real estate, you assume the legal status of the decedent: The decedent’s acquisition costs and the date of acquisition remain valid. For example, if the property was purchased in 1995 for 200,000 euros and you sell it in 2026 for 500,000 euros, the profit is tax-free (holding period of over 10 years). The depreciation claimed by the decedent increases the profit. The inheritance tax paid on the property is not included in the acquisition costs.

What costs can I deduct from the capital gain?

All costs directly related to the sale are deductible: the seller’s real estate agent’s commission, costs for an appraisal, costs for advertisements and property listings, notary and land registry fees for the transfer of ownership, as well as any prepayment penalty if the bank loan is paid off early. The following are not deductible: general legal consultation fees, costs for renovations carried out prior to the sale that do not constitute subsequent construction costs, and the real estate transfer tax paid at the time of the original purchase, which is already included in the acquisition costs. A particularly relevant item for property owners in the Nuremberg metropolitan region is the prepayment penalty: For an outstanding loan with a fixed interest rate, this can quickly amount to 10,000 to 30,000 euros and significantly reduces the taxable profit. If you are unsure which costs are deductible in your specific case, we recommend consulting a tax advisor-because every deductible euro directly reduces your tax burden.

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