Taxation of U.S. Citizens and U.S. 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 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.  

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