For the very last time:
The very big chance

(1998)
 

Note (2004): due to the tax reform in 2003-2004 a lot of information is not up-to-date anymore. Please inform yourself at the respective finance offices in order to get the current deductions.

Overall view

Depreciation for wear and tear
Special expenses / advertising costs
Special depreciation – new federal states / Berlin
Increased depreciation for buildings in redevelopment areas
Increased depreciation for buildings under monument protection
Tax deductibility in case of greater maintenance efforts
Advantages for owner occupants
Tax-free sale

 

The year 1999 brings a grave turning point with it for nearly all taxpayers: there will be extensive changes in the tax advantages of freehold properties and other leased properties. This makes it seem recommendable to still acquire a property this year – as far as possible – and take advantage of the tax advantages still valid today for the entire recovery period.

Do not wait for what the lawmaker decides.
Decide for yourself!

With this information letter we want to shortly point out ones more what is possible – and why you should take advantage of it. Briefly summarized we can list the following categories:

  1. depreciation for wear and tear
  2. special expenses / advertising costs
  3. special depreciation – new federal states / Berlin
  4. increased depreciation for buildings in redevelopment areas
  5. increased depreciation for buildings under monument protection
  6. tax deductibility in case of greater maintenance efforts
  7. advantages for owner occupiers
  8. tax-free sale

 

Depreciation for wear and tear

This fiscal assertion of expenditures for leased property, which is the most common one since many years, pertains to the wear and tear of the building as such. The lawmaker has set the rate of this deduction to be 2% annually, over a time period of 50 years – the so-called linear depreciation. However costs for the land property are not included into this, but additional costs of the purchase (broker, notary, entry in the land register, land purchase tax and travels to the visitation) are being added to the acquisition costs (however, the percentage of garden- and property share is being deducted beforehand – please don’t run into despair!).

This rate, having been calculated and approved by the finance office, is a fixed rate which you now can deduct from taxes up to selling the property, or for 50 years.

The increased deduction for buildings which have been built before the 1st January 1925 is 2,5%;  but pay attention that you can bring an actual evidence for the finance office that the building actually has this age (such as the building file, office of land registry or similar).

What’s interesting, because it is clearly higher, is the reducing depreciation for new buildings, consisting of 5% in the year of completion as well as the 7 years thereafter, and then 2,5% for further 6 years and then 1,25% for another 36 years.

The linear depreciation for leased buildings
will probably remain effective

Currently it doesn’t seem to be the plan to change something about these basic depreciation regulations in future. But we will only know more details once the new fiscal legislation has been passed.

 

Special expenses and advertising costs

In view of the taxes, interest of debt as well as expenditures for the financing in the year of the purchase and a disagio which one got granted perhaps, fall under the advertising costs which are deductible in the year of the purchase. Of course these expenditures stand vis-à-vis to the rental incomes and need to be regarded accordingly.

Tip: collect all receipts, keep account of all travels

Further advertising costs, amongst others, are: guarantee fees, maintenance fees for repairs (see below), technical literature, cost of money, entries in the land register for mortgages and land charges, janitor payments, costs for maintenance, brokerage fees for finding a tenant (not for sale and purchase) and furniture (in case of a furnished lease; proportionally calculated onto the length of use); notary fees for mortgage and land charge records, newspaper advertisements for finding tenants, insurances and all other expenses which you have not transferred onto the tenant, except: maintenance reserve funds and house administration. These cannot be deducted in any case.

It is often economic to deposit the advertising cost flat rate of 42 DM / m² annually in the matter of added costs.

ATTENTION: this flat rate, unfortunately, is supposed to be cancelled again starting in 1999; it has been simplifying many a thing.

 

Special depreciation
New federal states and Berlin

It undoubtedly is the most practised form of attaining high tax advantages. The so-called development area regulation has been extended repeatedly in order to salvage the existing properties of the five new federal states and Berlin (incl. western Berlin!) i.e. to refurbish them and to create sufficient new living space. This possibility now terminatedly ends at the deadline 31st December 1998! Very important: still buying in this year, one needs to have completed the property up to the 31st December 1999, otherwise the increased depreciation will not be accepted and the linear depreciation of 2% will be applied.

What is the purpose of the special depreciation? Let us go into the version of “apartments / old buildings to be refurbished”:

40% of the refurbishment costs (also including part of the additional acquisition costs) are fully deductible in the year of the purchase and in the following three years; the allocation can practically be done “according to requirements”.

60% of the refurbishment costs (including as above) will then be allocated to the remaining time period as soon as the 40% are used up.

The special depreciation is THE chance
to do fiscal “provisions” for one more time
for a time period of TEN YEARS

Generally this version, amongst all others, is the recommendable one. The only hitch is: the danger to buy over-expensive residential space due to motives to save taxes. Thus absolutely inform yourself if the respective purchase price is appropriate.

Important: the tax advantage can only be utilized in full if one still buys in this year and renders a down payment of the full sum of the purchase price. But get this down payment collateralized by a bank guarantee of the property developer. Also make sure that your purchase contracts are formulated in such a way that you will not get a “bad awakening” later when you get the tax assessment…

And: make sure that the acceptance of construction work is being done by qualified experts.

Another tip: it often occurs that 5- and 10-years rent guarantees are being offered. Check out the guarantor!

Yet the most important tip: whoever wants to use this advantage, this unique gift of a century to taxpayers, has to act NOW and has to act RAPIDLY.

 

Increased depreciation for
buildings in redevelopment areas

This tax advantage will probably be cut starting from the 1st January 1999, which we can only bemoan however. For up to now actions on buildings in areas which had been designated as redevelopment areas by the city have been just as much advantaged as actions on listed buildings. That is to say, the refurbishment expenses were able to be deducted by 100% over 10 years, meaning with a rate of 10% annually. Since especially in the new federal states the need of refurbishment is still high, it seems like there will be quite an attraction vanishing for private building developers to invest.

Urbanistic redevelopment areas
will be discarded as to tax advantages

 

Increased deduction for
buildings under monument protection

Even though this deduction possibility will not be discarded in full, it is only supposed to be written off with 5% on 20 years instead of 100% on 10 years in future. This too is much to our regret, since investments into listed property had definitely contributed to the attractiveness of our German country and are rather to be seen under the aspect of the whole social usefulness than of the personal speculation. Because vis-à-vis to the advantages there are clear risks of old building structures and high costs for refurbishment actions.

Even though monument protection
is still being subsidized by the state,
it can only be deducted over
the double time period.

 

Tax deductibility in case
of greater maintenance efforts

The regulation in effect up to now says: if after acquiring a leased apartment one modernizes or repairs it, then usually these expenses can be proven to be maintenance expenditures, as far as they don’t exceed 15% of the purchase price. Higher modernization or refurbishment actions will automatically be added to the acquisition costs in the first three years after the purchase and will be depreciated on a straight-line basis. This 15%-borderline is not binding and can be made to undergo an examination by the finance offices, but it generally gets accepted as guideline.

Such supplementary maintenance expenses can also be allotted to a time period of two to five years. This regulation of the allocation is, however, also supposed to be discarded by the tax office; in future, maintenance expenses are only supposed to be deductible from taxes in the year where they arise.

TIP: start bigger maintenance efforts
which are needed still this year
and complete them next year

 

Advantages for owner occupants

As it often used to be the case in past, advantages to owner occupants are being cut tremendously. The hitherto flat rate for initial costs is supposed to be dispensed with entirely (remember: in past costs which incurred before the acquisition were able to be deducted also by owner occupants to a large degree; this has been changed to a flat rate of 3.500 DM on 1st January 1996, which additionally is bound to the preservation of the home owner’s allowance).

Also the maintenance expenditures when acquiring used living space are supposed to be dispensed with or be cut.

The owner-used property is, at the same time,
the most “idiosyncratic” one of all…

Also the possibility of getting a higher deduction on refurbishment actions of one’s own living space in urbanistic reconstruction areas is supposed to be discarded (see above). Actually a pity, it would have contributed a lot to keeping time-honoured building fabric.

The same happens to the residential space under monument protection; here the period of write-off will be extended to 20 years, just as it is with leased buildings under monument protection.

Our conclusion (not without tongue-in-cheek): only purchase properties as capital investment, and live for rent oneself…

 

Tax-free sale

The hitherto regulation that a property can be sold tax-free after two years (or plainly: a profit gotten does not need to be taxed) is supposed to be changed to that effect that the sales profit gotten for rented out living space is only supposed to be freed of taxes after ten years. A change which absolutely accords to our business philosophy, saying that real properties conduce to the long-lasting value creation and not the short-term speculations. However, a five-years-regulation is not to be sneezed at either… in the case of owner-used living space the hitherto two-year regulation is supposed to be kept.

So for some, there are definitely motives to still act in 1998:

Those who pay high taxes should take advantage of the regulation for development areas subsidies; those who had maintenance expenses should possibly claim these in full or at least allocate the expense in a way that it partially becomes due in this year and partially in the next; yet who does not own a property at all should think about whether a purchase, still in this year, wouldn’t be sensible by reasons of the yield or other considerations.

 

We gladly help you with further advisement regarding all these questions and problems. Note: there is no guarantee for any of these information, since the taxation laws have become extremely complicated over the years and there is no simplification of same in sight.

 

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