Tax optimisation of real estate assets: the advantages of a property limited company

Often, property or real estate assets are held either as private assets or in partnerships. A less common, but potentially advantageous option for larger real estate assets is to hold them in a limited liability company (GmbH). This alternative offers interesting tax perspectives and structuring options, which will be examined in more detail in the following article.

Acquisition of real estate by a limited liability company

In the case of a real estate limited liability company (GmbH), the company acquires ownership of the real estate or property. With regard to the acquisition of the real estate assets, several options are conceivable, for example, the sale and financing by means of loans or a high level of equity capital. An important consideration here is the real estate transfer tax, which must always be included in the calculation.

What are the advantages of a property limited company?

Tax advantages

Probably the biggest advantage of a property limited company lies in the ongoing taxation:

• If a limited company exclusively rents out its own property, the current annual profits from the rental are taxed at just 15% corporation tax plus the solidarity surcharge. As a rule, trade tax does not apply in this case. If the profits are not distributed but reinvested, the tax advantage remains.
• If, on the other hand, the net income for the year is distributed from the GmbH to the private assets of the shareholder(s), an additional 25% capital gains tax plus the solidarity surcharge will be due. As part of the shareholder’s income tax return, an optimisation of investments held in private assets can then be examined.
• If another GmbH is set up as a shareholder of the Immobilien-GmbH, this may also result in tax advantages for distributions to the parent company.

Salary payments and profit reduction

The managing director’s remuneration in a property limited liability company is subject to regular income tax and, if applicable, social security contributions. However, they have the effect of reducing the profits of the limited liability company, which offers a further tax structuring option within the usual framework.

What disadvantages can be associated with a property company?

Permanent tax liability

While the sale of a property held as private assets is tax-free after 10 years or if it is used for your own residential purposes for certain periods of time, an increase in the value of a property or a property in a property company is always taxable, regardless of the holding period, and must be taxed upon sale.

However, under certain conditions, the taxation of the increase in value can be avoided in the real estate limited liability company – at least temporarily – if a reinvestment in a new property eligible for preferential treatment is made within a prescribed period.

Higher administrative burden

In contrast to letting private property, where only an attachment called Anlage V has to be completed in the income tax return, managing a property company involves significantly more work:

• submitting a corporate income tax return, a trade tax return and, if applicable, a VAT return;
• preparing a balance sheet and submitting a special e-balance sheet to the tax office;
• disclosure requirements in the Bundesanzeiger (Federal Gazette).

No advantage in gift and inheritance tax

As a rule, a property limited company offers no advantages in terms of gift or inheritance tax, since third-party property used for commercial purposes is generally not considered to be a tax-privileged asset.

If a GmbH share is given away as part of an anticipated succession or inherited in the event of death, the properties included in the GmbH’s business assets are also included in the valuation for the purposes of gift or inheritance tax.

Conclusion and recommendation

The real estate limited liability company can be a sensible alternative to the usual arrangements. It is certainly an interesting option for managing larger real estate assets, but not for individual condominiums, for example.

However, individual advice from a tax advisor is essential to fully understand and optimally utilise the tax and administrative aspects.