You inherit a property abroad and are wondering whether the German tax office will take a cut? The answer is almost always yes, but the tax burden depends on just three factors. This guide shows you how to correctly calculate inheritance tax on a property abroad and avoid pitfalls.
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The topic briefly and concisely
If you are a resident in Germany, your entire global assets, including overseas properties, are subject to German inheritance tax (unlimited tax liability).
Double taxation agreements (DBA) on inheritance tax only exist with 6 countries; for all others, the credit must be actively applied for under § 21 ErbStG.
The value of the foreign property must be verified by the heir (usually through an appraisal) to avoid a potentially disadvantageous estimate by the tax office.
An inherited holiday home in Spain or a chalet in Switzerland – what initially seems like a blessing can quickly become a complex tax issue. In Germany, the principle of worldwide income applies, meaning that foreign real estate is subject to German inheritance tax as soon as the deceased or the heir has a residence in Germany. Many heirs are surprised when they receive a letter from the German tax office and face double taxation. However, with the right knowledge about double taxation agreements, valuation methods, and credit options, you can reduce your tax burden by up to 100% of the tax paid abroad. We guide you through the 4 crucial steps.
Step 1: Check tax liability in Germany
First, it must be clarified whether there is any tax liability in Germany at all. The German Inheritance Tax Act (ErbStG) differentiates between two fundamental cases that determine the taxation of worldwide assets. The unlimited tax liability under § 2 ErbStG applies if only one of the parties involved – i.e., the deceased or the heir – has their residence in Germany at the time of inheritance.
In this case, the entire worldwide assets, including property abroad, are used for the calculation of the German inheritance tax. Even German citizens who have lived abroad for less than five years are still considered to have unlimited tax liability. In contrast, limited tax liability applies if neither the deceased nor the heir has a residence in Germany, but so-called domestic assets (e.g., an apartment in Berlin) are inherited. Therefore, correctly determining the tax liability is the first step in understanding the applicable gift and inheritance tax.
Step 2: Identify Double Taxation Agreements (DBA)
If an unlimited tax liability has been established in Germany, there is a risk of double taxation if the foreign country also imposes inheritance tax. To prevent this, Germany has concluded a specific double taxation agreement (DTA) for inheritances with only six countries: Denmark, France, Greece, Sweden, Switzerland, and the USA.
These agreements determine which state has the primary right to tax, which is usually the country where the property is located. For example, if you inherit a house in the USA, the tax paid there will be fully credited against the German tax. For popular countries like Spain, Italy, or Austria, there is no such agreement, which makes the situation significantly more complex for heirs. A digital inheritance manager can help keep track of country-specific regulations and plan the next steps.
Step 3: Utilize the credit for foreign tax according to § 21 ErbStG
If no double taxation agreement exists, section 21 of the Inheritance Tax Act provides an alternative solution to avoid double taxation. Upon request, the inheritance tax demonstrably paid abroad can be credited against the German tax liability. This application is crucial, as the credit is not automatically granted. However, the credit is limited to the amount of German tax that is attributable to the foreign assets.
To apply for the credit, you must submit several documents to the tax office:
Proof of the value of the foreign property (e.g., through an appraisal).
The foreign tax assessment notice showing the determined tax.
Proof of full payment of the tax abroad.
An application for credit within the five-year limitation period.
A precise inheritance tax calculator can provide an initial indication of the possible credit amount. The correct valuation of the property is the next critical factor.
Step 4: Accurately Determine Property Value for the Tax Office
The German tax office requires the specification of the 'fair market value' of foreign property for the calculation of inheritance tax, which corresponds to the market value on the date of death. Since German appraisal methods such as the comparative or income approach are often not applicable abroad, the burden of proof lies with the heir. According to § 90 of the Fiscal Code, you as a taxpayer must prove the value, which in practice is usually done through an expert opinion.
The costs for such an appraisal, ranging from 0.5% to 1.5% of the property's value, are often a good investment to avoid an excessive estimate by the tax office. For rented properties in EU countries, the tax authorities at least offer a 10% valuation discount. A professional international property valuation provides the necessary legal certainty here. With the determined value, you can then utilise your personal allowances.
Apply allowances and tax classes to reduce the tax burden
Once the taxable value of the foreign property has been established, you can claim your personal allowances. The amount of these allowances directly depends on the degree of kinship to the deceased and can significantly reduce the tax burden. The allowances can also be used for gifts every 10 years.
The most important allowances according to tax class I are:
Spouses and registered civil partners: €500,000
Children and stepchildren: €400,000
Grandchildren: €200,000 (€400,000 if the parent is already deceased)
Parents and grandparents (only in case of inheritance): €100,000
If the value of the property after deducting the allowances is still positive, the respective tax rate of the tax class is applied to the remaining amount. Therefore, a precise knowledge of the market value of the property is essential for tax planning.
Conclusion: Actively avoid double taxation with data-driven assessment
The calculation of inheritance tax for a property abroad requires careful, step-by-step examination. Your tax status, the existence of a double taxation agreement, and a correct, verifiable property valuation are crucial. Act proactively to avoid double taxation, as without your application under section 21 ErbStG, tax paid abroad will not be credited. This can lead to avoidable additional costs of over 30% of the property's value.
A data-driven evaluation from Auctoa provides you with the necessary market value proof for the tax office. For an initial assessment, you can also use our ImmoGPT chat to quickly and easily address your individual questions. In the end, a well-founded strategy is the safest way to protect your inherited assets.
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Additional useful links
The Federal Ministry of Finance offers comprehensive information on inheritance and gift tax.
The Federal Statistical Office provides statistics on inheritances and gifts in Germany.
You can also find a detailed statistical report on inheritance and gift tax at the Federal Statistical Office.
Information about double taxation agreements is available on the Federal Ministry of Finance website.
The platform Laws in the Internet grants access to the complete Inheritance Tax Act (ErbStG).
The Inheritance Tax Implementation Ordinance (ErbStDV) can also be found on Laws in the Internet.
Stiftung Warentest provides an article on how tax offices determine the market value of real estate.
Haufe offers an article on the valuation of real estate within the framework of inheritance tax.
FAQ
Do I need to declare a foreign property inherited in the German tax return?
Yes, absolutely. If you have unlimited tax liability in Germany, you must report your entire estate, including real estate abroad, to the relevant German tax office within three months. Failure to report can be considered tax evasion.
What exemptions apply to an inherited property abroad?
The same personal allowances apply as for domestic assets. For spouses, the allowance is 500,000 euros, for children 400,000 euros, and for grandchildren 200,000 euros. These can be deducted from the determined market value of the foreign property.
What is the difference between limited and unlimited tax liability?
Unlimited tax liability (§ 2 para. 1 No. 1 ErbStG) applies if the deceased or the heir resides in Germany. In this case, the entire worldwide assets are taxed. Limited tax liability (§ 2 para. 1 No. 3 ErbStG) applies when nobody resides in Germany, but German assets (e.g. a property) are inherited. In this case, only these domestic assets are taxed.
How do I prove the value of a foreign property?
The best proof is provided by an expert opinion from a qualified, independent expert. Alternatively, a sale price achieved shortly after the inheritance event can serve as evidence of the market value. The costs for the expert opinion are borne by the heir.
What happens if I don't claim a credit for the taxes paid abroad?
If you do not apply for credit under § 21 ErbStG, you may end up paying the full inheritance tax in both countries. The tax office does not automatically grant the credit, so your action is required.
Are there any special features for properties within the EU?
Yes, one advantage is the 10% valuation discount for properties rented for residential purposes, which also applies to properties in EU and EEA countries. Furthermore, the value of an EU property used for tax purposes must not exceed the value of a comparable property in Germany.
