Whether you are better off selling or renting out your house is one of the most important financial decisions owners face. Selling frees up capital immediately, renting out secures ongoing income and preserves your wealth in the form of the property. Both routes have solid advantages and disadvantages when it comes to proceeds, taxes, effort and risk. This guide weighs the central decision criteria neutrally and shows in which situations selling tends to make sense and in which renting out does. There is no blanket answer, but there are good criteria for your personal decision.
The Basic Question: Free Up Capital or Hold Wealth
At the core, two logics stand opposed. With a sale you receive the full proceeds at once: you pay off any remaining debt, create liquidity for other plans and are free of all obligations as an owner in one stroke. With renting out you keep the property as a tangible asset, earn monthly rental income (Mieteinkünfte) and benefit from possible further appreciation, but in return you carry responsibility, effort and risk on an ongoing basis.
Before the detailed calculation, three simple guiding questions help:
- Do you need the capital? Anyone who needs the proceeds for a property purchase, for retirement provision or to pay off debt tends toward selling.
- Can you bear the effort and risk of renting out? Renting out is an activity, not passive income. It requires time, nerves and financial reserves.
- What is the location and condition of the property? In sought-after locations with solid building fabric there is more to be said for holding, whereas with a renovation backlog and weak demand there is often more to be said for selling.
Only once these questions are roughly settled is it worth taking a close look at yield and taxes.
The Financial Comparison: Sale Proceeds Versus Rental Yield
The sale brings one-off proceeds with which you can do as you please, for example through a broadly diversified investment. Renting out brings an ongoing yield from the rent plus the chance of appreciation. To make the two comparable, the rental yield helps.
You calculate the gross rental yield (Bruttomietrendite) using the rule of thumb: annual net cold rent divided by the purchase price, times one hundred. Example: 16,000 euros annual cold rent for a property worth 400,000 euros gives a gross rental yield of four percent.
More meaningful is the net rental yield. Here you deduct the non-apportionable costs and the maintenance reserve from the annual cold rent and set the result in relation to the capital invested including incidental costs. As a rough market guide, a gross rental yield of around three to four percent is considered solid in many German cities, well above four percent is often associated with higher location risks, and below three percent is usual in expensive prime locations.
A second rule of thumb is the price-to-rent factor (Mietmultiplikator): if the value exceeds 25 times the annual net cold rent, the ongoing yield is usually low, and selling becomes relatively more attractive. These values are market rules of thumb, not fixed standards.
Taxes on a Sale: Speculation Tax under § 23 EStG
On a sale, the so-called speculation tax (Spekulationssteuer) may apply to the gain. The legal basis is § 23 EStG (private disposal transactions). If you sell a property at a profit within ten years of purchase, that profit is taxable. What matters are the dates of the notarized purchase and sale contracts.
There is one important exception: if the house was owner-occupied, the gain remains tax-free. This applies if you have used the property yourself continuously, or if you occupied it in the year of sale and in the two preceding calendar years (the three-calendar-year rule). For most families selling their own home, no speculation tax therefore arises.
If the house was rented out, however, the ten-year period applies. Put simply, the gain is the sale price less acquisition and selling costs and is taxed at your personal income tax rate, which can reach around 42 percent. Depreciation already claimed increases the taxable gain. Gains from private disposal transactions of under 1,000 euros per year remain tax-free. Anyone who rents out and later sells within the period should therefore factor in the tax burden.
Taxes on Renting Out: Rental Income and Depreciation under § 21 EStG
Rental income (Mieteinkünfte) is income from letting and leasing under § 21 EStG and is taxed at your personal income tax rate. However, it is not the full rent that is taxed, but the surplus after deducting income-related expenses.
Deductible income-related expenses include, among others:
- Depreciation (AfA): generally two percent of the building value per year (excluding the land share) for older buildings from construction year 1925 onward, and three percent for eligible new builds under certain conditions.
- Debt interest from loans attributable to the property.
- Maintenance expenditure such as repairs and upkeep.
- Administration, insurance and agent costs as well as property tax, insofar as not apportionable to tenants.
Through depreciation and interest, the ongoing tax burden can fall noticeably; in the early years with high financing, tax losses often even arise that can be offset against other income. Important: depreciation reduces the acquisition costs and thus increases a later taxable sale gain. Selling and renting out should therefore be thought through together for tax purposes.
Realistically Assessing the Effort and Risks of Renting Out
Renting out is not effortless extra income. Anyone who takes this step takes on ongoing obligations and bears several risks:
- Tenant management: tenant selection with credit checks, the rental contract, the service charge statement, rent increases and conflict resolution cost time and care. A property manager takes work off your hands but costs money and reduces the yield.
- Rent default: late payment, vacancy and, in the rare but expensive case, rent defaulters are among the real risks. Keep a liquidity reserve for several months' rent.
- Maintenance: the roof, heating, windows and façade cause considerable costs over the years. As a rule of thumb, a reserve of around one to one and a half percent of the building value per year is advisable, and rather more for older houses.
- Regulation: in strained housing markets, rent caps and ceiling limits apply, which is the case in several NRW cities. Tax rules can also change.
These points are not arguments against renting out, but they show: the net yield after costs, taxes and time spent is usually considerably lower than the gross figure suggests.
Personal Situation, Market Conditions and Timing
Numbers are only half the decision. At least equally important is your personal and family situation. Do you live nearby and have the time and inclination to look after tenants and the property? Or should the property bring peace of mind and predictable wealth rather than additional tasks? In older age or under health strain, many owners experience the ongoing responsibility as a burden; here there is often more to be said for a sale that makes the capital clearly and worry-free available.
The market conditions also play a role. In sought-after locations with stable demand, both selling and renting out work well. With weak demand, falling rents or a high need for renovation, renting out becomes riskier, and a sale in a good market environment secures the value. No one reliably hits the perfect moment; a well-founded assessment of location, condition and realistic value is more valuable than speculating on the ideal moment.
It helps to calculate both scenarios once: the net proceeds of the sale against the expected net rental yield over a realistic period. A well-founded valuation is the basis for this.
Special Cases: Inherited House and Relocation
Two situations deserve special attention.
Inherited house: for the speculation tax, heirs step into the shoes of the deceased. What matters for the ten-year period is therefore the original purchase date of the deceased, not the inheritance event. If the purchase was more than ten years ago, a sale is generally free of speculation tax. To be distinguished from this is inheritance tax with its tax-free allowances, around 400,000 euros per child and 500,000 euros for spouses. An owner-occupied family home can pass on free of inheritance tax under certain conditions, provided it is occupied promptly. Where there are several heirs, a sale is often the simplest solution, because it creates clearly divisible proceeds.
Relocation or a job-related move: anyone who moves away can keep the old home as a tangible asset and rent it out or fully detach by selling. In favor of renting out from a distance is the preservation of value, against it the increased administrative effort over distance, which usually makes a property manager necessary. Anyone who needs the freed-up capital for a new home at the destination is often better off selling.
