The man, facing eviction for not paying his rent, had barricaded himself in his flat with the hostages.
After smelling smoke, police stormed the flat where they found the bodies. All five are said to have died of gunshot wounds.
As well as the gunman, a bailiff and a locksmith died, along with the flat-owner and a prospective tenant.
The hostage-taking began when officials arrived on Wednesday morning to evict a man from a block of flats in the city in south-west Germany.
At about 09:00 local time (07:00 GMT), several shots rang out and police were called.
An area around the block in the Nordstadt area was sealed off and hundreds of police officers were deployed. A school and a kindergarten nearby were evacuated.
It is unclear whether or not police had made contact with the hostage-taker before the shootings.
"Special forces broke into the apartment after smelling smoke," a police spokesman told Reuters news agency.
German media said that initially four bodies, including the gunman, were discovered in the flat on the top floor of the building. It then emerged that a woman's body had also been found.
She was thought to be the hostage-taker's partner, unconfirmed reports said.
The smoke was so thick in the flat that "you couldn't see your hand in front of your eyes", a police spokesman was quoted as saying.
Police believed the gunman was a hunter who possessed several weapons.
"I am deeply shocked by the deaths of five people, including a bailiff working as a justice official for Karlsruhe district court," Baden-Wuerttemberg's Justice Minister Rainer Stickelberger said, according to Bild website. It was an "incomprehensible act," he added.
Source: BBC News
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