Real estates and the upcoming tax reform (1998)

The henceforth upcoming tax reform will be especially afflicting the real estate market, as one can expect. Landlords will be faced with taxation of the capital gain when they keep their property for less than ten years. Providing that the property is let - properties used by the owner will be excepted by this.

A misfortune for all those that had bought properties in the new states with the idea to resell after five years. On the other hand it is no reason to worry at an early stage. Since first of all only the gain – meaning the difference achieved – needs to be taxed, which need to be gained at first; second of all, it anyways accords to a wise and long-term strategy to keep real property. Furthermore, this is not affecting those dealing with commercial real property, since these anyways had to pay taxes on the commercial gain of the real estate business and need to keep on doing so.

The action will be a misfortune in those cases where real properties have been bought cheaply and the acquirer was planning from the beginning on to resell the property profitably after four or five years. In this case he now has to bite the bullet and pay taxes on the gain at his personal tax rate. Small consolation: Where something needs to be taxed, something will be left over in any case. For it will be looking much worse to those reselling their property with no gain at all or even with loss – no matter after what time period.

There are further important changes in the depreciation for wear and tear. As is generally known, the special depreciation for wear and tear anyways expires in the new federal states and Berlin by the 31st December 1998 – so whoever wants to profit by this law for the upcoming ten years needs to act immediately and acquire a not-renovated apartment or house still this year and refurbish and complete it by the 31st December 1999.

Many do not know that the special depreciation for wear and tear for old buildings consists of a sum amounting to 40 % of the refurbishment costs, including the percentage of the acquisition costs. Based on ones decision this sum can be put in claim and deducted in the year of the purchase or divided by four years starting from the year of the purchase. The advantage for self-employed: also retroactive corrections toward the tax office are possible – meaning one can arbitrarily divide and rearrange these 40%, as it is optimum based on ones income tax.

The rest of the refurbishment costs can be divided into the remaining time equally, e.g. also 60% into 9 years or 6 years, depending on how one divided the first 40%.

It is yet uncertain what the depreciation will look like in future. Some proclamations are sitting in space. For instance, to name a few, the increased possibility of depreciation for refurbishments on landmarked buildings is supposed to be prolonged from (as it is now) 10 years / 100% to 20 years / 100%. This means that the yearly deductable sum only consists of 5 instead of 10%; a difference that could be giving some constructors a hard time to even come close to a landmarked building. A shame about the urban development, and yet another drop of bitterness will fall upon the old roofs: the special regulations for urbanistic redevelopment areas, hitherto virtually on equal terms with the monument protection, is supposed to be cancelled fully. Though this very regulation could have brought into being an indirect extension of the special depreciation for wear and tear in the new federal states if it would have been kept (in spite of being divided by 10 years to 10% / year); from now on this constructional substance is supposed to be put under the normal old building depreciation for wear and tear. No more incentive for any constructor to deal with some scruffy walls when he is not forced to do so…. And, unfortunately, a sad point of view for the cities.

As to what will happen to the depreciation for wear and tear for new buildings and if the current regulation will be kept – nobody really knows.

Our recommendation:

Whoever can afford it should invest his funds into real estates still this year and should take advantage of the fiscal benefits as far as possible, and even perhaps secure an extensive advantage for the next TEN years.