Bargains of the special kind:
listed properties

(1997)
 

High tax advantages – good locations

Since many years the government assists the preservation of listed buildings or buildings in need of renovation in special areas (so-called redevelopment areas).

With the discussion of the large tax reform also this subvention got put into the category of subventions to be reduced. Even though the jury is still out especially in the subject of tax reform and numerous final decisions will probably only be done around the end of the year, one can already see now that the cut backs will have such a touchy effect that an investment into listed residential or commercial property can only said to be highly attractive until the end of 1998.

Indeed also after this listed buildings will still get a better support than usual house construction or purchase, but the currently excellent support also lets an investment for high tax progressions seem more than worthwhile, especially in better locations or the best ones.

So let us inspect the regulations which are valid currently in detail:

First of all it is important to understand the term monument. The German national committee for monument protection has formulated the following recommendation in 1975:

“Cultural monuments are (mobile and immobile) properties, single entities and parts of properties in whose preservation there is a public interest due to historical, artistic, scientific or architectural reasons.”

The responsible department for evaluating a building as cultural monument i.e. as listed is the respective monument protection authority. These are being given advice by the technical authorities for monuments. Only the certification of the monument protection authority is what matters for evaluating the tax advantages. When it comes to constructional actions (such as redevelopment, refurbishment, reconstruction etc) then of course the building authorities are the responsible ones as usual. But these are taking into account the interests of the monumental protection in the course of the construction licensing procedure.

Also important to know is that not in every federal state a monument needs to be listed in the book of monuments in order to be recognized as such. In Hesse for instance there is the so-called law principle which says that the lawful characteristic of being a monument is enough by itself to put all the objects which fulfil the monument character per law under protection, regardless of whether they are listed in the book of monuments or not. From the land register alone the monument usually doesn’t become apparent.

This can lead to surprises in some cases: for instance a couple has bought a homestead in 1990 without knowing that the half-timbered residential house was under monument protection. Also the previous owners and the agent didn’t know anything about this.

When they sent in an application for certain actions of reconstruction years later the building authority wrote back noting that the property is a listed building. This was not noted in the land register but in the file of the house which was existent at the building authority. The effect of this was that first the responsible monument conservator had to be called in to look at the planned constructional actions.

In practice this can lead to delays, expensive actions and sometimes thwarted building plans. So in any case one should inform oneself by the building authority or the historic preservation agency before one purchases a building where monumental protection is suspected.

How increased tax advantages get granted

We emphasize ones more: without certification of the office of monuments the tax office does not grant any additional tax advantages. This certification must state exactly what extent the monumental protection has (e.g. many art nouveau buildings in large cities only have the façade listed; thus only refurbishment actions in this part of the house get supported).

Basically the lawmaker, when granting tax advantages, differentiates from owner-used and rented out residential or commercial space. The regulations still valid at this date are noted down in § 10f of the Income Tax Act and in §7i or h of the Income Tax Act.

But what is classified as eligible for tax subsidy based on the regulations of listed buildings? In this regard there is an exact formulation in the law which says that higher tax-deduction can be called upon for costs of production for constructional actions which, in their manner and extent, are necessary for keeping the building as a monument or for its sensible use and which have been implemented after coordination with the office responsible according to federal state regulation.

So the formulations which are significant in single cases are “keeping the building as a monument” and “for its sensible use”. So it is quite imaginable that an old mill is getting used as a tavern and gets reconstructed accordingly, if it is vacant at the moment. So based on § 7h/I or, in case of owner occupants, based on § 10f of the Income Tax Act nearly all production costs can be written off, as long as the office of monuments issues the accordant certification.

Important is that:

The purchase needs to be done before the action of production/ construction is started.

Every bill for every action must be certified as benefited by the office of monuments. So it could happen that an outbuilding does not get classified as to be supported by tax exemption because based on the office of monuments’ opinion this outbuilding is not necessary for a sensible use. The decisive point is that, before starting the constructional actions i.e. in the phase of planning, you make an agreement with the office of monuments about which actions fall under the regulations of the monument protection and which don’t.

The office of monuments also needs to know the condition of the property before any constructional actions begin, in order to be able to evaluate to which extent structural alteration works and refurbishment actions are to be classified as necessary for sensible use.

One can also obtain the first classification of a property as monument from the office of monuments before the property gets bought and reconstructed.

In this case one should agree with the respective people why it would be more reasonable to put the property under monument protection. For instance it could be that otherwise no investor gets found for the property because the tax-related attractions are too few and the reconstruction costs are too high, and the building will fall into decay.

Even if there might be single points in regards to the building action whereby you might not agree with the office of monuments, what applies at large is: if you act based on the conditions set by the office and if you abide by them then you have a good hand for getting most actions supported by the tax office, as you imagine. Perhaps there might be points which you need to yield to, or you might need to do without tax subventions for certain building actions, and then call upon the normal depreciation.

Additionally – even though this is not the subject of this article – we want to refer to the point that in several federal states subsidies can be approved by the state office of monuments. Such financial subsidies by public authorities, usually in form of so-called lost subventions or low-interest loans – have the purpose of preserving valuable historical substance. Many cities for instance took extensive measures for years in order to support the restoration of half-timbered facades, all in the frame of one refurbishment program. So one should inform oneself in any case! Of course one cannot claim additional tax advantages for subsidies received.

Note: also purchasing costs are sometimes getting higher deductions in single cases. This applies for constructional or refurbishment actions, which are part of the purchase price but only get started after the purchase. But actions which have been done before the sales contract has been done do not get deduction.

So pay careful attention to not purchasing a property which is fully refurbished! Otherwise all tax advantages which you might have gotten in the frame of the monument protection are lost.

But also pay attention to seeing the respective documents for inspection before doing such a sales contract with planned refurbishment actions, from which you bindingly (meaning with acknowledgment of the office of monuments) can see which actions fall under the added depreciation. By no means should you rely on the mere promises of a salesman or property developer. When in doubt, ask the office of monuments yourself.

But what are the exact
tax regulations now?

The instructions we shortly describe hereafter will presumably still be in effect until the end of 1999, whereby we clearly have to note that every property should be evaluated on its own.

The regulation for owner-occupiers is:

The depreciation of the special expenses, being 10% per year of the expenses for the acquisition which fall under the regulations of the monument protection, namely for ten years. That means: in ten years the production or refurbishment costs get written off by 100%. So depending on the tax rate one can get up to about 40-45% of the production costs returned from the tax office.

Important: developing an attic floor in an otherwise monumentally protected building is not necessarily eligible for subsidy based on the regulations of the monument protection! Such subsidy is only warranted if one can proof that the building can only get a sensible use after the attic floor gets developed.

The regulation for rented out buildings is:

10% deduction for ten years on all constructional actions which, based on the certification of the office of monuments, have been done for the purpose of keeping the monument i.e. for the sensible use of the building, as explained above.

This can bring about enormous tax advantages in single cases. What’s crucial is:

The acquisition costs for the building get deducted as usual (2 or 2,5% depreciation for leased buildings; home owner’s allowance for owner-used property), based on § 7 or 10 of the Income Tax Act. As usual, the acquisition costs for land property can not be deducted. Of course the basic rules of every real estate investment apply: the location is the key, as well as the use and the lastingly attainable, realistic yield after the refurbishment. Only then one should include tax advantages into the calculation. But especially in highly attractive locations, such as e.g. the Rhine-Main area, one sometimes finds real bargains for which the refurbishment and the whole action are absolutely worthwhile from fiscal aspects and from economic viewpoints!

Example

Rates of deduction:

So from the year of the purchase, as far as this is also the year of the beginning of construction, the following depreciations apply for ten years:

So when e.g. five taxpayers unite with a high progression in the frame of a civil law association or limited partnership and acquire and refurbish the property, best in coordination with a tax advisor, then each of them, according to his share of 20% of the whole action, can draw on a fifth of the mentioned rates. That is respectable 49.600 DM for ten years.

Additionally of course the interest cost which incur along with the external financing can be enforced. The rental receipts, however, are being counted as income.

Financing:

620.000 DM share (= 1/5th)
Own funds out of this: 80.000 DM (e.g. building loan agreement, ready for allotment)
540.000 DM financed with 5,7% on a fixed time period of ten years
30.780 DM initial interest per year
Plus 2% amortization = 10.800 DM annually
Initial rental income:
26.000 DM (1/5th) annually
Funding gap of interest: 4.780 DM. These are being declared as a loss for tax reasons.

With an income of 130.000 DM, income tax table for married couples, two children, including solidarity tax and church tax this means:

Tax without property acquisition: 36.637 DM
Deduction sum from leasing and depreciation: 54.380 DM
Savings per year: 20.380 DM

And this for ten years (slightly variable depending on the increase of one’s income and higher rental income as well as less interest per year)

So the whole action of 620.000 DM is tax-deductible by about 200.000 DM! That is almost 30% net of the purchasing and production costs.

It is needless to say that such a property, if being kept well, forms a profitable important pillar or a second retirement provision after ten years!

Important:

Presumably these advantages only apply for building actions which are getting completed until 31st December 1998 – as far as the tax reform is really getting implemented still before the Bundestag elections! So it is vital that one acts fast.

 

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