The son of a Jewish fabric manufacturer turned banker from Berlin, Liebermann grew up in an imposing town house alongside the Brandenburg Gate. He first studied law and philosophy at the University of Berlin, but later studied painting and drawing in Weimar in 1869, in Paris in 1872, and in the Netherlands in 1876–77. During the Franco-Prussian War (1870–71), Liebermann served as a medic with the Order of St. John near Metz. After living and working for some time in Munich, he finally returned to Berlin in 1884, where he remained for the rest of his life. He was married in 1884 to Martha Marckwald (1857–1943).
He used his own inherited wealth to assemble an impressive collection of French Impressionist works. He later chose scenes of the bourgeoisie, as well as aspects of his garden near Lake Wannsee, as motifs for his paintings. In Berlin, he became a famous painter of portraits; his work is especially close in spirit to Édouard Manet. In his work he steered away from religious subject matter, with one cautionary exception being an early painting, The 12-Year-Old Jesus in the Temple With the Scholars (1879).