A note on felling trees
to reap their fruits

 

So far, nothing is official. Up to now it is just the stated intentions and decisions of a new government which has nailed it’s coalition agreement. And yet we don’t fool ourselves: the adjudications passed in regard to reducing the few remaining fiscal advantages of owning real estates seem like the reintroduction of birching. It seems like politicians and their advisors do all they can to destroy as many good reasons as they can for acquiring and building private residential buildings in order to rent them out. However, thanks to the very solid growth of real estates in our country, they will not fully succeed in doing so. But that is a different chapter, which is certainly not due to the capers of fiscal law developments.

Let us just have a look at the general cancellation of the speculative period. Let us just factor out the owner occupant and hope that at least he will remain untroubled by it. But until a few years ago one used to be able to resell one’s property free of taxes after keeping it for two years. That caused a tremendous appetite to do investments and the consequence was a lot of movement on the market, which also brought the state large sums of property acquisition tax and work orders and jobs to the building industry.

Then, when this period for rented out properties got extended to ten years, things were immediately looking much drearier. A lot of people lost their enthusiasm about selling or buying real estates. On top of it, a trap door got integrated on the quiet, which by itself was enough to ruin one’s joy in owning real property. Since then, not only the gain attained when selling a property is subject to the personal income tax (it is getting added to the fiscal income achieved in the year of the sale), no – also the amortizations called upon are now (when purchasing after the 31. July 1995) fully subject to income tax when the property is getting sold before the ten years period is over (we have referred to this in an earlier information letter). (It remains unclear how this will be regulated in future).

But that is not all: the amortizations are yet getting cut again, the declining amortization for new buildings is supposed to be cancelled fully, loss allocations supposed to be further limited and the tenancy law, perhaps, supposed to be tightened – all this to the disadvantage of the tenant. And yet we haven’t even mentioned the property acquisition tax up to now. If this shall really be raised in a new unit of time, as it seems to be the idea, then this would be another stab into the heart of citizens that are willing to invest, and that righteously consider the rented out property the supporting pillar of building their wealth. Let us hope that these adjudications will not become a provocation to the tax-compliance of the citizens, now that tax-compliance is supposed to be brought forward and demanded. But: does the state, then, consequentially need to be surprised when such laws bring about a result that a part of the sales prices is getting handled outside of the sales contract, as we’ve seen it in other countries? Heaven forbid, but certainly to some the temptation to do so is hanging in the air.

Perhaps all this will result in the situation that willing investors are looking for other countries where owning real property is not getting impeded but rewarded. Where it is possible to resell the property free of taxes after a certain time period. Where a well-balanced tenancy law exists and yes, also where the yield is better than in the real estate market of Germany. Allowedly, it is not just the current government’s fault. Earlier ones haven’t done better in this regard. Just remember the ample and frivolous tax gifts for the redevelopment in the East. At that times the state’s treasury got distributed to the citizens to such a degree that almost anyone, whether it was reasonable for him or not, wanted to snap at the chance. The special depreciation and the overreaching speculations on the land markets of the new federal states have lead to a market distortion which is, and will remain, unique in the history of our country. This, of course, backfired tremendously; this action lead to an empty treasury, contributed to the state indebtedness and ultimately brought about the biggest wave of bankruptcies which the building industry has ever experienced. Even unhesitant investors do not consider building residential spaces a very attractive investment possibility today and thus turn to the commercial real estate market in the form of open property funds. For the funds are not subject to some of the disadvantages that the private residence owner is subject to. Nobody needs to worry about troubles with the tenant as a landlord, nobody needs to worry about buying or selling – acquiring the property is as simple as buying government bonds.

Someone claiming the burdens of renting out and administering freehold property from the tenant should also create the possibility to gain advantages from it at the other end. Of course, some actions to save energy are getting advanced for instance, and also tax advantages can be gained from it. But that is not the point.

It is rather the general atmosphere that is getting created hereby, which we are talking about. It is an atmosphere of disinclination, of reluctance to use the realm of leased residential properties as an investment. Decisions like the ones we have been talking about here are deadly to boosting the economy; this needn’t be specially stressed here. They are stops to the potential building developer or also to the craftsman, hoping for the market becoming revitalized in order to create jobs and give people their wage and bread.

The state is trying to place the stranglehold at a very sensitive spot here, whereby the fatal effect is not particularly the immediate financial i.e. fiscal effect for the individual. What’s really fatal is the paralyzing effect which such decisions have upon the economic situation; the building industry is not getting off the ground. The private real estate market is getting pushed off even further. Money from the private assets is not getting invested into the most important sector of building industry but it is getting stocked or invested somewhere else. One could say that the patient is lying in coma while the blood reserves are at their ends. There are no new ones because the blood donors from the past are getting billed for donating blood instead of getting rewarded for it, as it used to be common in past.

Or, bringing it into a different point of view: the government is acting like a fruit grower whose ladder has no more rungs. And so he takes the saw and chops down all the fruit trees in order to reap their fruits. When asking him what he is considering to do next year and the year after, he just answers in a lapidary way: that will be solved by itself. Well, in this way certainly nothing will solve itself. For a paralyzed national economy cannot flourish and prosper. When the folk has no more enthusiasm to economy, the country does not advance, and there is no fiscal income from e.g. property acquisition tax or purchase tax, trade tax or income tax. And then the question is: by what means should the planned educational reforms (which are needed urgently) be paid if there will be even less money going into the treasury? When the rich get punished for their richness instead of getting encouraged, by means of advantages and rewards, to invest the needed money and let it flow into the circle of our economy? It is no shame to have wealthy people in our country! Why now also punish them, and even punish them retroactively – is all we are thinking of the retroactive effect of changing the speculative period?

Yes, the monumental protection will perhaps be kept to us. It would certainly be a shame if this too would be discarded – for then our lovely Germany would gnaw on keeping its listed buildings in a few years. But we cannot put every building under monumental protection just in order to attain some more tax advantages, especially not newly built ones – so this cannot boost the building industry either. Nor can we tidy up dilapidated old houses in the new federal states in order to secure tax advantages, if afterwards these buildings cannot be rented out. However they can only be rented out if the economy flourishes and prospers and if it gets new impulses and incentives and the citizen gets encouraged to get involved again. How should Germany pick herself up by the bootstraps (Ex Federal president Herzog) when on the other side everyone who starts picking up is getting rebuked for it?

Not like this, government. No matter what the name of the party is that is called for getting Germany’s economy rolling right now – they are anyways all called for it. Bundestag and Bundesrat, federation, states and communities need to pull together and stop the skirmish of the different parties and the ideological tug of war. It is a matter of the economical future of Germany and the economical future of Europe, for Germany is – and will remain – the pivot point of economy in the unified Europe. There is no large golden bucket sitting in Brussels from where money flows out arbitrarily. In fact most of the money going to Brussels comes from Germany – how should that work in future if now the anyhow limping trade cycle is getting punished for not getting started?

Let us get back to the real property. It is an indispensable economic good in our country. The building and real estate economy, the free rental market, the free market economy in general have been pillars of rebuilding our country in the 50es and 60s. Then later it became an attractive investment opportunity for people with greater income, who were at least investing a part of it into the building sector of economy instead of paying 40-50% taxes. With sufficient risks and disadvantages, as it is needless to say. Owning a real property means responsibility and task. The citizen who is offering the residential space is relieving the state a part of its duty to ensure the well-being and the life of its citizens – and he used to get compensated for this by getting tax advantages. This principle has after all proven it’s worth over decades, disregarding the biased tax advantages of the special depreciation in the years after the reunification.

Governmental paternalism and daylight robbery have never been aids to encourage the citizen. They cause displeasure, disinterest and withdrawal from the tasks that are concerning all of us. They are no good means to get the wheel of economy rolling. What is needed are signals that show that doing investments is profitable again.

The real property remains to be an important investment. Perhaps future investors will see to it even more that they acquire their properties at locations where they can keep them forever without having to worry. Where they can hand them down and get them handed down again. In cities where there is a proper infrastructure and where you have enough jobs, also the privately owned home remains to be an attractive investment.

The house builder who prefers to invest his money into his own home instead of paying rent might not bemoan the loss of the home owner’s allowance for singles or couples without children; but to families with children, the own home – as far as they do not accept an inheritance – is moving beyond reach.

Solvent groups of buyers, however, will still be looking for properties for their own use. It is more fun to live in one’s own home and be free to create it the way one likes as having to ask a landlord about it. The creativeness of designing the rooms, the possibility to put in one’s own ideas into creating the living space are all factors which are making the acquisition of a privately owned home attractive – perhaps more than ever.

Even though the government is giving us a hard time real estates will continue to be purchased. Probably not so much for the purpose of capital investments and rental properties, but rather by wealthy owner users. Real property remains expensive in our country for it is becoming a more and more scarce commodity in our country. But this fact in itself will not create new rental space. Clear impulses are needed in order to give inducements to buy. How do we get the building industry rolling and with it the entire economic situation moving again? This will be a point to be considered much more. Because one thing is already official: it won’t get rolling with the adjudication that has been made!

Our current hints for you are:

  1. If you want to sell, sell before 2002 as long as the new law with the regulations regarding the tax on profit has not yet been passed. If you have purchased less than ten years ago then wait a little more – there is a certain chance that the law in the Bundesrat fails with the obstacles it is still facing.
  2. If you want to purchase then look out for special offers now, for bargains. But also check what advantages you can get with that sales price, as long as the seller does still have a certain advantage in selling before the end of 2002 – before the new laws get passed.
  3. If you want to purchase for your own use then do this as soon as possible in order to – in case you consider this – still take advantage from the full home owner’s allowance.
  4. If you plan to acquire an income property then you should get one with (a) a high yield, (b) earning expectations of long duration (good location and well-rentable) and (c) no need to deal for a sale – or to sell in years when tax advantages are good (e.g. low rate of taxes in the retirement age, in case applicable)

 

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