Buying Property Abroad: What German Buyers Must Consider

The law of the country where the property is located always applies

The most important principle first: for a property, the law of the country in which it stands almost always applies, the so-called law of the country where the property is located (Belegenheitsstaat). German notions of the land register, the notary or the transfer of ownership cannot simply be applied to other countries. Even within Europe, the procedures differ considerably.

In many continental European countries such as France, Spain or Italy there is indeed a notary who certifies the purchase and initiates the transfer of ownership. Unlike in Germany, however, the notary is there often a state official and not a partisan adviser for you as the buyer. In countries with an Anglo-Saxon legal system such as the United Kingdom or the USA, the purchase is usually handled not through a notary but through lawyers who draft contracts and carry out the review.

From this follows a central recommendation: do not rely on what you know from Germany. Before every signature, have an independent, locally experienced and ideally German-speaking legal adviser accompany you, one who represents your interests exclusively.

Proof of ownership: land register, cadastre and their pitfalls

In Germany the land register reliably indicates who owns a plot and which encumbrances rest on it. Many countries have a similar register, often split into a cadastre for location and area and a land register or property register for rights and encumbrances. The reliability of these registers, however, varies greatly, and in some regions entries are incomplete or outdated.

Before buying, a current register extract should therefore always be obtained and expertly checked. The following points are particularly important:

• Is the seller actually the sole owner?
• Are there mortgages, land charges or other encumbrances on the property?
• Are there third-party rights such as rights of way, utility or usufruct rights that restrict use?
• Do the plot size and the buildings match the registered data?

As long as these questions are not resolved beyond doubt, no payments should flow. If down payments or reservation fees are demanded, settlement via an escrow or client account of the notary or lawyer is considerably safer than a direct payment to the seller.

Financing and currency risk

Financing a property abroad is often more difficult than buying at home. German banks usually finance properties abroad only cautiously and with higher equity requirements, because security abroad is difficult for them to realise. A common solution in practice is therefore to mortgage an existing property in Germany or sell it in order to fund the purchase abroad from your own funds.

Alternatively, a loan from a bank in the target country may be an option. There, however, different creditworthiness standards apply, different rules on fixed-interest periods and early repayment, as well as different consumer protection. Examine not only the interest rate but the entire conditions, and have the loan agreement independently reviewed before signing.

Particular caution applies outside the eurozone. If financing or payment is in a foreign currency, you bear an exchange rate risk: if the rate moves unfavourably, the purchase price, interest and repayment rise noticeably when calculated in euros. Foreign-currency loans are considered risky for private individuals and should only be entered into with a clear risk strategy.

Acquisition costs and ongoing costs in the target country

As in Germany, ancillary costs noticeably increase the purchase price, and abroad they are often higher. As a rough guide, across countries you should calculate around 10 to 15 percent in acquisition costs. The exact rates differ considerably from country to country and partly from region to region, so the following ranges are only typical orders of magnitude:

• Real estate transfer tax (Grunderwerbsteuer): usually the largest item, often in the range of around 4 to 10 percent of the purchase price.
• Notary, register and cadastre costs for certification and registration.
• Broker fees, depending on the country around 3 to 6 percent, sometimes paid by the buyer, sometimes by the seller, sometimes split.

In addition there are ongoing costs that many buyers underestimate. Almost everywhere there is an annual land or property tax, often with special rules for second and holiday homes. There are also municipal charges for water, waste and sewage, as well as, in residential complexes, the service charge for administration, pool, garden or security. Factor these items in realistically before you buy.

Double taxation and your German tax liability

A property abroad does not release you from German tax. Anyone who has their residence or habitual abode in Germany is subject to unlimited tax liability here and must in principle declare their entire worldwide income, including rental income from abroad.

So that there is no double taxation, there are double taxation agreements (Doppelbesteuerungsabkommen) between Germany and many states. For property it almost always applies: the country in which the property is located may tax the rental income and, as a rule, also the capital gain on sale. Germany then usually exempts this income. For properties outside the EU and EEA, it is nevertheless taken into account via the progression proviso (Progressionsvorbehalt), meaning it can increase your personal tax rate for the remaining income. If the property is in an EU or EEA state, the progression proviso for rental income generally does not apply; a well-known exception is Spain.

Also important is the German speculation period (Spekulationsfrist): if you sell a rented property at a profit within ten years, this can be taxable in Germany, regardless of whether the property is located at home or abroad. These connections are complex and depend on the individual case, so you should go through them with a tax adviser before buying.

Inheritance and gifts: what German owners should note

German tax law also applies when bequeathing or gifting a property abroad. If the testator, donor or recipient is resident in Germany, the worldwide assets are in principle subject to German inheritance or gift tax, including the house abroad.

The problem: the country where the property is located often levies its own inheritance tax as well. Unlike with income tax, there are dedicated agreements with only a few countries that expressly avoid a double burden in the event of inheritance. In many cases, however, the tax paid abroad can, under certain conditions, be credited against the German inheritance tax.

Because several legal systems quickly meet here, far-sighted succession planning early and during one's lifetime is worthwhile. This often makes it possible to avoid double taxation and disputes among heirs. Seek legal and tax advice on this, ideally from experts who know both German and foreign law.

Typical pitfalls and a reputable process

Many problems with buying abroad recur. Consumer advocates and experts warn above all about these points:

• Unauthorised construction and missing building permit: pools, terrace roofs, extensions or entire buildings are often unauthorised or not registered. The consequences range from fines to a demolition order. Demand the building permits and reconcile the plans with the actual buildings.
• Incorrect or incomplete register entries: unregistered encumbrances, third-party rights or a seller who is not the sole owner at all.
• Language barrier: signing contracts in a language you do not fully understand is risky. If necessary, bring in a sworn translator.
• Binding preliminary contracts: reservation or preliminary contracts can already create obligations, and withdrawal is often only possible with a penalty payment. Sign only after legal review.
• High advance payments: direct payments to the seller before ownership is secured are dangerous.

For a reputable process the following applies: independent legal advice in the target country, examination of all documents, payments only via escrow, and no decision based solely on listings. View the property in person and be sceptical of offers that sound too good.