Calculating Taxes and Rental Income for Buy-to-Let Apartment in Berlin

Question

I hope you're all well. I need some guidance regarding a financial scenario I'm considering. I'll break it down as clearly as possible to ensure I get accurate advice.

Let's simplify things by discussing monthly gross payments rather than annual ones.

I currently earn €8,750 each month in Berlin. Unfortunately, taxes are taking a significant portion of my earnings, around €2,417.53, which equates to approximately 27.64% of my income. In addition, Berlin's progressive tax structure leads to further deductions such as TK health insurance, care insurance, and pension insurance, totaling €1,282. This means a total of almost €3,700 is deducted monthly, leaving me with a net salary of €5,050.

Now, I'm considering investing in a buy-to-let apartment valued at €285,000. Assuming I take out a loan at the current interest rate of 4.5%, I aim to make monthly mortgage payments of €1,500. I also intend to rent out the apartment, generating a rental income of €1,500 per month. This brings my total monthly income to €10,250.

Given that I fall under tax Class 1, I'm aware of the provision allowing deduction of interest payments from gross income when filing taxes. The monthly interest amount on my mortgage is calculated to be €994.

By subtracting the interest amount, my monthly gross income is reduced to €9,256. Here's where I need assistance: I'm uncertain about the exact amount of tax I'll be liable for. Based on my calculations, applying a 27.64% tax rate would yield approximately €2,558. This implies an increase of €141 compared to my initial tax estimate.

Thus, my estimated rental income would be €1,500 - €141 = €1,359. This scenario raises concerns because, even after the investment, I'd still need to supplement the property's finances with €141 of my own funds each month.

To ensure I have a clear understanding, I've provided all relevant figures. Could someone please review my calculations and offer guidance? I want to be certain that I'm making accurate assessments before proceeding. Your insights would be greatly appreciated.

Thank you in advance for your help.

Answer 1

No, you cannot apply the average taxe rate of 27% to additional income. However, good news, you can also depreciate your apartment.

The tax is progressive: for 2023, you pay 0% on the first 909€ income (per month), 14% on the next 50€ per month, 14.1% on the next 50€, 14.2% on the next 50€ and so on. For anything above 5200€/month, you pay 42% tax, but only for the amount above that value. The average tax rate will be lower, in your case apparently 27%.

But since you are in the 42% tax bracket, any additional income will be taxed at that rate, that includes rental income. You will also have to pay Solidaritätszuschlag (above a yearly income of around 75k€), which is about another 2% (it's also progressive). If you pay church taxes, they will also apply here.

You can deduct the interest (and some other costs related to the property, e.g. repairs) from that rental income. You can also depreciate the property (AfA), which is 2% of the value of the flat (but not the cost of the land); if the house was built in 2023 or later, it is 3% per year. Assuming 2% and maybe an apartment value of 250k, that is 415€ per month.

Whatever is left over is taxed at your personal tax rate, in your case 42% + 2% Solidaritätszuschlag. So if your rental income is 1500€, deducting the interest rate of 994€ and a depreciation of 415€, you pay 44%*91€=40€ in taxes, which is probably neglectable. (You may also want to ask a tax adviser at least in the first year, they may find other things, e.g. you can also deduct costs for the real estate agent. And maybe even do that before you buy, to do the calculation with you.)

However, please note that the amount you get from your tenants is not the amount you earn, as you have costs (e.g. insurance, repairs, vavancies and so on). If it is an apartment, this is mostly covered by the Hausgeld (which is usually mentioned in the offer, and can be up to several hundred €/month). Some of those costs you can get from your tenants as part of the Nebenkosten (e.g. costs for water, waste disposal, cleaning, ...), some of it you can't (repairs, management costs, ...).

In general though, it is hard to break even (e.g. to not have to supplement the property), otherwise, a lot more people would just buy and not rent. If a tenant could buy the flat and pay 1500€ to the bank instead of 1500€ to you, and eventually own the apartment, they will usually prefer to do it.

So you may want to verify your values and check for hidden costs (like Hausgeld), and especially the expected rental income, as for Berlin, 1500€ net rental income is relatively high for a 285k€ property (unless you got a really good deal).