Taxation U.S. Citizens/Residents of Rental Income Derived from Real Property Located in Germany

Taxation U.S. Citizens/Residents of Rental Income Derived from Real Property Located in Germany

The U.S. is notorious for imposing taxation on worldwide income of its citizens and permanent residents. The article outlines the taxation of rental income from real property located in Germany of U.S. residents and citizen (living in the U.S. or abroad).

Taxation under U.S. Tax Laws

The receipt of rental income is clearly a taxable event under the Internal Revenue Code (hereinafter “IRC”). As a taxable event, rental income would assumingly be captured by the IRS’ worldwide taxation net. (IRC § 1.61-8) However, application of the Germany-U.S. Income Tax Treaty can result in a slightly different result.

Generally, citizens and/or permanent residents with rental properties abroad would report the income as worldwide income on their U.S. tax returns in the same manner as if the property was located in the U.S. The taxpayer would then claim a credit for taxes paid abroad and deduct expenses. Owning property in Germany requires a different process to comply with international law and IRS regulations.

Effect of the Germany-U.S. Income Tax Treaty

Germany can tax rental income from real property located in Germany. See Art. 6 of Germany-U.S. Income Tax Treaty

Unfortunately, the Treaty holds that the U.S. can subject its citizens and residents to taxation. See Art. 4 and 5 of the Germany-U.S. Income Tax Treaty.

Thus, a U.S. citizen/resident with real property deriving rental income in Germany would report such income on his/her tax return. The income would be reported as negative income under the section dedicated to miscellaneous income and Form 8833 would be attached. (IRS Publication (2016) 519) Form 8833 would cite Article 6 of the Treaty and the relevant language. 

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