Purchase real property now
- pros or cons?


It is true; the real estate market in Germany is going through an upheaval since two or three years. Many capital investors have become rather withdrawn due to the changes of the tax laws; the so-called “Paragraph 2B” (cancellation of the so-called amortization patterns), cutback of the income limits for the first-home buyer allowance, implementation of maxima for loss deduction, the later change of refurbishment costs and the high fiscal back-payments (to the tax office!) that come along with that, the increase of the property acquisition tax and extension of the speculative period to ten years. Private house building is declining. The price that tenants need to pay for this tax policy is increasing rents in the congested urban areas.

On top of that, the undifferentiated tax demand of acquiring real estates has become unstoppable in the new federal states during the 90-es. Investors and banks are not just worried about the vacancies, but also about the fact that if one intends to sell one’s real estate before ten years are over, one might need to pay back tax advantages already received, which is a shame for anyone trying to detach from a suffering property. Since this tax change is supposed to be retroactive the supreme tax court addresses this – and certainly also the Federal Constitutional Court will do so soon. Whoever is affected by this will be better off to object to any given tax statement as in regards to the pending process.

Unfortunately this poor policy has also lead to losses of hundreds of thousands jobs in the building industry as well as innumerable businesses going bankrupt. A vicious circle that can only be burst when brave politicians start taking brave steps again toward supporting house building.  But politics is not our issue, and neither is the question what government will be the better now.

Nevertheless some gleams of hope have remained for the property acquirer, and hence there are possibilities also for those that want to save taxes through the purchase of real estate. The paragraph on monument protection still makes it possible to deduct the act of refurbishment over a time period of ten years – respectively ten per cent / year. The same holds true for property in urbanistic redevelopment areas – and by the way, this tax advantage is also granted to owner occupants, which can be a great advantage for many property buyers (hint: partially use it himself, partially rent it out, for instance).

But it’s a shame for the monument protection: most of the refurbishment- and listed buildings – especially those with a high refurbishment effort and hence high tax advantages – are located in the new federal states, where building construction still suffers from the poor renting demand. Someone who wants to invest here should especially pay attention to lasting ability to lease – thus the charged rents play a vital role just as much as the location does. It is needless to say that only the best residential areas should be chosen for such an investment.

And what remains is the courage of private constructors to keep to their goals despite economic and fiscal uncertainties: the courage to ones own four walls – the “my home is my castle”-guideline. With building privately owned homes is coming back to life especially in regards to one- or two-family homes, and especially in areas where building has not become a nightmare through exorbitant land prices. Thusly we can clearly determine two trends today, to which yet a third one adds, which we will talk about later:

1. The tendency to one’s own home is intensely high

2. In the congested urban areas, the acquisition of freehold flats prevails.

However, the groups of buyers have shifted. Most notably there are more and more younger people that are, by means of inheritance, coming to know the true promise of building their own home without years of making set-asides into a building loan contract, which never leads to building. More and more people pay their property without financing, or they only finance a small part of it, which makes the risk that they cannot come up with the interest payments anymore very small. Since, at the same time, the banks have anyhow raised the financing criteria, constructors have no more chance at a 100%-financing, and neither do investors, if they are not getting the payment of an executive board or otherwise payments for high officials.

There is no doubt: the real estate remains a vital part of our live. We need a house to live in, a room to study, space, security and safety. And so rentals are being done – or purchases if one can afford it. Fiscal basic conditions won’t help it. Some build, to rent it out afterwards, others purchase to use it themselves. Where there are no constructors – there is no residential space. Where you have a lack of landlords that are willing to offer their apartments and houses for rent there is a shortage of residential space, high rents and climbing land prices.

Also when it seems that the state has thoroughly spoiled the subject of construction to us – after all, all that happened is that decades of government grant have come to an end. But at the same time, it has been carried to excess: the speculative period of ten years certainly has been a deathblow to the real estate market – its cancellation and cutting down to five years would have been the only correct action to remedy this from a political viewpoint. All other fiscal aspects can essentially remain as they are now and domestic construction would still be attractive. One just needs to detach oneself from the tax-gift mentality which has predominated especially in the 90-es. And needs to have a look again at the actual advantages of a property investment, since there are: secure investment into property, property value retention, an investment that is not affected by inflation, asset value wins against money value, inheritable landholding, additional income or rent set-asides for the old age, and still some possible tax advantages.

Real estates have something to do with people. And people have goals, wishes and dreams. The wishes to have ones own house is as old as mankind itself. Even someone starting out small – like with his-or-her own student apartment for instance – usually owns a beautiful home one day, for after the small one comes the bigger home, then the house – as soon as the children need their own space as well. And after all the “speculative period” does not apply for owner-used property when at least two years have gone by since the time of moving in. One can take advantage of the subsidy for ones privately owned home early in life, like when one doesn’t have much income yet; and when one gets married and the spouse hasn’t taken advantage of it yet, one can use it a second time for the first bigger apartment. By the time one is building a house one hardly needs it anymore at all – for by then the own family’s income, inherited capital, the tax-free gain from selling the first two properties and set asides should be enough to pay the house – and of course bearing in mind the internal labour. From that point of view, real property is a worthwhile thing especially also for younger people.

But what is the third trend which we have hinted at before? Right, it is

3. Real property in foreign countries.

In the past years there has been an increasing trend to property in foreign countries. Many people where buying property in Spain, Italy or France – some of them even to emigrate – and some to use them as rentable capital assets. The foreign property is still on the upswing, whereas the buyers have become more smart and choosy. Also here a lot of people have learned it the hard way – especially those that tried to launder money through foreign real estates, bypassing the financial administration, an action that we most-definitely discourage from.

The possibilities to build up an own independent existence by means of the modern information technology are another factor today that plays a vital role in acquiring a real property. People have become more independent through the internet. Someone with the accordant qualifications and know-how can build up an existence almost anywhere in the world today – and still be closely connected up to the world and his employers. Service rendering is at a high demand. Someone selling his service from home at the PC and send it out per email or homepage basically has the freedom of choice of where he lives. Meaning that he can afford a whole house with land somewhere outside at the countryside where prices are still low and get it for the same price that he would spend on an expensive apartment in a congested residential area. As long as electricity and telephone are available. This too is an interesting viewpoint. Especially within the realm of rural properties one can find bargains here and there, which one can turn into gems bit by bit.

The important point is that one is willing to just decide also in uncertain times. People that are able to decide are people that win. People that are undecided do not take conclusions and only move forward slowly or not at all. Look at any successful person and you will see: it’s a person who can decide. The decision of acquiring a real property often is one of the most important ones in a person’s life. It may be quite a worry sometimes, but after all – when the basic prerequisites are right – it will be the right decision. If the basic prerequisites are not right or not right yet, then people decide to rent and don’t think about the other option too much, until the needed capital assets for purchasing a property are there and the rest of the finance can be handled over 10, 20 or 30 years without a problem.



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