US real estate is a popular investment for people and businesses from all over the world. Many German investors also see US real estate as a good choice. Part of this results from the tax benefits of German investors in US real estate.
The tax rules in the US can be beneficial for German investors. However, the tax codes are complex. You can leverage different tax benefits depending on your investing strategy. This post will cover some of the tax benefits of real estate investing in America.
US Real Estate Tax Benefits of German Investors
Lower Taxes on Rental Income
The average individual pays lower taxes in the US than in Germany. Both countries have a progressive tax structure, but the rates are higher in Germany. If you look at the US, the individual rates range from 10-37%. In Germany, the individual rates range from 14-45%. If you are collecting rental income, there is a good chance the US will tax you less than Germany.
Less Tax on Real Estate Sales
The Internal Revenue Service (IRS) taxes the sale of real estate as capital gains. As long as you hold the property for more than a year, the highest rate is 20%. That is the current long-term capital gains rate in the US. Germany treats the sale of real estate like regular income. That means it is subject to the same progressive tax rates as your other income. However, you might be able to avoid paying taxes on the sale if you hold the property for more than ten years.
No Double Taxation
The US taxes all income a person generates within the country and its territories. Germany taxes all worldwide income of its citizens and residents. These facts might seem like a recipe for double taxation if a German invests in US real estate. However, the countries have a tax treaty that can help investors avoid double taxation. Under the treaty, the investor only needs to pay tax on real estate income in the US. Germany won’t tax the income, but the amount will factor when determining the individual’s tax bracket in Germany.
Deferred Gains
Another benefit of the US tax code is the ability to defer gains. With a 1031 exchange, the investor can sell a property without having to recognize the gains for tax purposes. If the purpose of the sale is to reinvest the money in another property, it could be eligible. Deferred taxation offers a level of flexibility to investors.
It is important to note that tax laws can change. As an investor, you need to know the latest tax codes. Consider working with a tax professional to help you with these complex matters.
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