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Real Estate and Taxes
The following explanation gives only a short informational overview of the relevant tax regulations and is intended exclusively for domestic individual persons. Due to their complexity and/or case-by-case variation, the subjects of “commercial land trade,” “estate and accessions tax,” “hobby activity,” and “opting for value added tax” will be discussed here only cursorily or not at all. In the case of real estate investment funds, the relevant tax regulation vary according to the investment concept. We would refer you in this case to the relevant sales brochure.
Investors
Facts
- Taxable income-related expenses tend to be higher than revenue particularly during the first decade after investment. This occurs even when no deductions can be made for a cultural heritage site. Over the course of your career, you will profit from these tax-related losses. Later, in retirement, returns from rental payments are generally taxed at a lower rate.
- Deduction of interest on debt as income-related expenses used for the acquisition or establishment of a property
- Possible deductible of 100% for renovation expenses in 12 years in the case of third-party occupation of historic properties/ properties in renovation areas
- Up to 90% of purchase price is tax-deductible
- Rental returns of up to 35% of purchase price through savings on income tax payment
Fundamentals of Taxation
Income greater than the base tax allowance of 7,664 Euro (2009) is subject to an income tax between 15% and 42%; incomes greater than 250,001 (combined family income: 500,000 Euro) is taxed at a rate of 45% (§ 32a EStG). In addition, a solidarity surcharge of 5.5% is compounded upon the applicable income tax. (§§ 3, 4 SolzG). Potentially applicable church taxes are not taken into account (cf. § 52a Abs. 2 EStG).
The returns and expenditures (income-related expenses) of a rented property are to be declared in the additional form V of the individual's tax returns.
Of the returns from renting and leasing which increase the amount of taxable income, different commodities are deducted variously.
If a loan is taken out to finance the acquisition or foundation of a property for third-party use, the interest on debt is tax-deductible according to § 9 Para. 1 Clause 1 EStG.
In accordance with §7 Para. 4 EStG, it is possible to deduct (write off) the wear and tear of a building allotment. This is calculated as a linear function distributed at rate of 2.5% p.a. over 40 years for historic buildings (established before Dec. 31, 1924). For newer buildings, write-offs for wear and tear are calculated linearly at a rate of 2% p.a. over a period of 50 years. For commercial properties, shorter write-off periods at commensurate higher depreciation rates are applied. The land value share is generally calculated by multiplying the (individual) share of land owned by the guiding value rate for land for the municipality.
Tax deductions can be made for renovation costs as well, which significantly increase property value: renovation areas and municipal development areas (§7h EStG) as well as historic buildings (§ 7i EStG) at a rate of 9% in the year of establishment and the following 7 years (provided the prescriptive preconditions), and at a rate of 7% in the 4 years that follow.
Owner-Occupants
Facts
- Tax-exempt yields on your property investment
- possibility for tax-exempt sale of owner-occupied properties
- possibility for tax-exempt bequest
- further possibilities for historic buildings/ properties in redevelopment areas: 100% of renovation costs deductible in 10 years, up to 90% of purchase price deductible, returns of up to 30% of purchase price through savings on income tax.
Fundamentals of Taxation
Yields from other capital investments are taxed at the individual rate of tax or the under the withholding tax. Income tax can comprise up to 45% of profits, plus solidarity tax and church tax (cf. §§ 32a EStG, §§ 3, 4 SolzG, § 52a Para. 2 EStG). Any change in value of properties for personal use is, however, not taxed.
Profits resulting from the sale of an owner-occupied property are not subject to taxation, provided that, from the time of purchase to the time of sale, regardless of how long, the property was used exclusively and not merely occasionally for personal habitation (BFH, ref.nr. IX B 159/07). If the property was previously under third-party use, the seller must have used the property exclusively and not merely occasionally for personal habitation during the year of sale and during the previous two years (§ 23 Para. 1 Pg. 1 Nr. 1 Pg. 3 ESTG). Vacation homes for personal use and second homes also fall under these regulations. In the case of other capital investments, profits are likewise taxed under withholding tax or within the individual's tax bracket. Investors also enjoy the advantage of tax-free sale of properties; however, this does not apply to commercial trade in property, and requires a 10 year holding period.
Since January 1, 2009, it is possible under §§ 13 Para 1 Nr. 4b, Para. 4a, and Para. 4b ErbStG to make tax-free bequests of properties used personally by the testator prior to the act of bequest to a spouse, registered partner, or children. Exception: children only receive a tax exemption for properties up to 200 square meters of living space; larger properties are potentially subject to estate tax (§ 13 Para. 1 Nr. 4b, 4c ErbStG). For tax exemption to apply, the heir is required to live in the property at least 10 years following inheritance and may not sell, rent, lease, or use the property merely as a second home. By comparison, other capital investments do not receive tax concessions to this extent (cf. §§ 12-13c ErbStG)
Owner-occupants may receive additional tax-based benefits when purchasing an historical property or a property in a redevelopment area or an urban development zone. In the year in which renovation are undertaken and in the 9 years following, it is possible--provided that all requirements outlined in § 7i or 7h are met--under § 10f EStG to deduct up to 9% p.a. of modernization costs which significantly increase the dwelling value of the property. Given the commensurate income, such tax abatements can constitute up to 30% of purchase price.
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