What Investors Should Know About Cross-Border Real Estate Investments

When considering real estate sales taxation between France and Germany, private investors need to be aware of several key factors. Real estate investments between these two countries have increased significantly in recent years. Many French investors have acquired properties in cities like Berlin or Munich as second homes or investment objects, while German investors are particularly active in Paris or on the French Riviera.

A crucial point in such cross-border investments is the real estate sales taxation when selling the property in the other country. Tax regulations differ considerably between France and Germany and can lead to very different (and sometimes surprising!) results.

The following overview shows the most important differences in direct sales (Asset Deal) and explains the tax consequences to be considered when selling a second home in a Franco-German context. It should be noted at the outset that a tax return on the capital gain must generally be filed in both countries – the investor’s country of residence and the country where the property is located.

This article was made possible with the kind support of Sabine Leuschner (Cabinet LeS-Legal), an expert in Franco-German tax law.

Two Different Fundamental Tax Principles

France: Generally Taxable Capital Gains

In France, the sale of real estate is generally taxable, regardless of how long the property was held. According to Article 150 U of the French General Tax Code (CGI), any sale for consideration of real estate (with the exception of the primary residence) or shares in real estate companies is generally subject to taxation.

However, French law provides for time-dependent tax relief:

Full exemption from income tax after 22 years of holding
Full exemption from social security contributions after 30 years of holding

Thus, the tax burden decreases gradually as the holding period increases. Consequently, a sale can be attractive before the end of the 22/30 year period in the case of low capital gains due to time-based discounts. A simulation of the tax burden on the taxable profit is recommended in any case before selling.

Germany: Tax Exemption After Ten Years

Private real estate sales are only taxable if they occur within ten years of acquisition. The “speculation period” begins with the conclusion of the notarized purchase contract. This rule stems from § 23 of the Income Tax Act (EStG). If the investment property is sold after this period has expired, the capital gain is generally completely tax-free.

Amount of the Tax Burden

Taxation in France

The taxable profit is subject to:

A flat income tax of 19%
As well as social security contributions.

The social security contributions amount to:

17.2% for persons socially insured in France
7.5% for persons belonging to a social security system in the EU, EEA, Switzerland, or the United Kingdom.

Additionally, for high profits, a surcharge between 2% and 6% can be levied if the taxable capital gain exceeds 50,000 euros.

Taxation in Germany

If the real estate sale takes place within the ten-year speculation period, the profit is taxed in Germany at the personal income tax rate. This can reach up to 45% depending on the total income taxable in Germany.

Tax Exemption for Owner-Occupied Properties

Both France and Germany provide a tax exemption for the owner’s own home.

France

The sale of the primary residence (résidence principale) is completely tax-free if the property is actually used by the owner at the time of sale.

Germany

In Germany, a tax exemption can also apply if the property:

Was used exclusively by the owner during the entire period of ownership, or
Was used for personal residential purposes in the year of the sale and in the two preceding calendar years.

Determination of Taxable Capital Gains

In principle, the capital gain is calculated as the difference between the selling price minus acquisition costs. Subtleties lie in the differences in deductible selling costs or necessary expenses related to the past acquisition. The higher the historical acquisition costs, including ancillary costs, the lower the capital gain. Acquisition ancillary costs include in particular:

Notary fees
Real estate agent commission
Real estate transfer tax (Grunderwerbsteuer).

As a special feature in France, the acquisition price can be increased by flat rates (without proof) for:

A flat 7.5% for acquisition ancillary costs
A 15% flat rate for renovations after five years of holding.

Cross-Border Cases: Germany–France

For cross-border situations, the Double Taxation Agreement (DTA) between Germany and France also applies. According to this, real estate gains are generally taxed in the state where the property is located. However, the state of residence is entitled to tax worldwide income. This double taxation is avoided under the DTA through credit or exemption mechanisms.

Example: Sale of a property in Berlin by an owner residing in France

In this case, the right of taxation belongs to Germany as the state of location. Germany taxes according to a progressive income tax rate. As a state of residence, France taxes the worldwide income of French tax residents. Consequently, the capital gain from Germany is taxed in France after deducting a credit amount corresponding to the German tax actually paid.

Detailed Example: Seller based in Paris sells a rented apartment in Berlin

Purchase price 2018: €400,000
Selling price 2026: €550,000
Capital gain: €150,000

Variant A1 – Holding period 8 years, no personal use
Since the ten-year period has not yet expired, the profit is taxable in Germany. With an illustrative German tax rate of 42%, this would result in a German income tax of approximately €63,000. France taxes the profit minus the credit; however, since the German rate is higher, the German tax can be fully credited against the French tax (up to the amount of French tax). Social security contributions of 17.2% in France are levied additionally.

Variant A2 – Holding period 12 years, no personal use
After the ten-year period, the gain is no longer taxable in Germany. France taxes the worldwide income. Since no tax was paid in Germany, there is no credit potential, and the gain remains fully taxable under French rules.

Conclusion

The tax treatment of real estate sales differs significantly between France and Germany. While Germany allows full tax exemption after ten years, France generally taxes every sale and only reduces the burden over long holding periods. For cross-border investors, forward-looking tax planning is crucial.

DISCLAIMER: This general presentation is not tax advice. Please contact your tax advisor with international expertise to clarify individual cases.

This article was prepared in collaboration with Sabine Leuschner (LeS-Legal law firm), an expert in French-German tax law.
E-mail : kanzlei@kanzlei-leuschner.eu