Taxation of rental income in Germany
Germany taxes rental income from real estate in Germany even if the owner is a non-resident. See § 49 EStG.
Taxation of rental income in the U.S.
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).
The U.S. citizen/resident may find relief from double taxation when filing his/her U.S. tax return. The IRC permits the taxpayer to claim either the foreign income exclusion (if the taxpayer resides in Germany) or the foreign tax credit to reduce the impact of Germany's taxation.
Effect of the Germany-U.S. Income Tax Treaty
Germany and the U.S. have entered into an agreement for the avoidance of double taxation in the area of income taxes (hereinafter Germany-U.S. Income Tax Treaty). Pursuant to Art. 6 of the Germany-U.S. Income Tax Treaty, Germany can tax rental income from real property located in Germany. However, the U.S. has reserved the right to tax U.S. citizens and U.S. residents. See Art. 4 and 5 of the Treaty ("Savings Clause"). Double taxation is avoided by crediting the German tax against the U.S. tax. See Art. 23 of the Germany-U.S. Income Tax Treaty.
