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Conservation property – Real estate and taxes

Denkmalschutz – Immobilien und Steuern

Tax advantages according to §§ 7i/h/10f EStG

A last bastion for converting taxes into assets is the listed property, since in addition to the normal depreciation on buildings, the modernisation expenditure, usually 50 % to 80 % of the purchase price, can be written off in full over 12 years by capital investors and 90 % over 10 years by owner-occupiers.
Every monument is unique and very special. To ensure that Germany’s monuments are preserved and maintained by private owners, the state has created targeted incentives. It contributes to the modernisation costs in the form of tax benefits. For example, 100 % of the renovation costs for a property used by a third party can be claimed against tax. In each of the first eight years 9% and in each of the following four years 7%. In the case of an owner-occupied property, 9% of the renovation costs may be claimed for tax purposes for 10 years each. It is only important that you are the owner of the listed property before it is renovated. Only then will you receive the full tax benefits when old buildings are given a new lease of life. Acquiring listed properties means converting taxes into tangible assets with a secure future.

Beneficiary properties

Investors can write off 100% of the costs for modernisation and repair, usually 50% to 80% of the purchase price, over twelve years according to §§ 7h/7i EStG, and owner-occupiers can write off 90% over 10 years according to § 10f EStG.

The development of tax law favours listed properties to a very special extent. In 2005/2006, almost all tax-saving products in Germany’s financial centre were abolished. As a result, the market for tax-privileged capital investments has virtually disappeared.
A last bastion for converting taxes into assets is the listed property, since in addition to the standard depreciation on buildings of 2 % or, in the case of buildings completed before 01.01.1925, 2.5 %, the modernisation expenditure, usually 50 % to 80 % of the purchase price, can also be written off in full over 12 years by capital investors and 90 % over 10 years by owner-occupiers.
To date, this has caused an enormous growth spurt in the sector, which is expected to continue unabated in the coming years. Consequently, tax legislation is providing further impetus for demand in the real estate market and thus creating the basis for sustainable price increases.

Every monument is unique and something very special. In order to ensure that Germany’s monuments are preserved and maintained by private owners, the state has, as already explained, created targeted incentives. It contributes to the modernisation costs in the form of tax benefits. For example, in the case of a property used by a third party, 100 % of the renovation costs can be claimed against tax. In each of the first eight years, 9 % and in each of the following four years 7 %. In the case of an owner-occupied property, 9% of the renovation costs may be claimed for tax purposes for 10 years in each case. The only important thing is that you are the owner before the renovation takes place. Only then will you receive the full tax benefits when old buildings are given a new lease of life.

§ Section 7i EStG Increased deductions for listed buildings

(1) In the case of a building located in Germany which is a listed building under the respective provisions of Land law, the taxpayer may, notwithstanding section 7(4) and (5), deduct up to 9 per cent in the year of construction and in each of the following seven years, and up to 7 per cent in each of the following four years, of the construction costs for building measures which, according to their nature and extent, are necessary for the preservation of the building as a listed building or for its reasonable use. A sensible use is only to be assumed if the building is used in such a way that the preservation of the substance of the building worthy of protection is guaranteed in the long term. Sentences 1 and 2 shall be applied mutatis mutandis to a part of a building located in Germany which is a listed building under the respective provisions of Land law. In the case of a building or part of a building located in Germany that does not in itself meet the requirements for a listed building but is part of a group of buildings or an entire complex that is protected as a unit in accordance with the respective provisions of Land law, the taxpayer may make the increased deductions from the production costs for construction measures that are necessary in terms of type and scope to preserve the external appearance of the group of buildings or the entire complex that is worthy of protection. The taxpayer may also claim the increased deductions in the year of completion of the construction measure and in the following eleven years for acquisition costs attributable to construction measures within the meaning of sentences 1 to 4, insofar as these were carried out after the legally effective conclusion of a compulsory acquisition contract or an equivalent legal act. The construction measures must have been carried out in consultation with the body referred to in paragraph 2. The increased deductions may only be claimed insofar as the construction or acquisition costs are not covered by subsidies from public funds. § Section 7h, subsection 1, sentence 5, shall apply mutatis mutandis.
(2) The taxpayer may claim the increased deductions only if he proves the requirements of paragraph 1 for the building or part of the building and for the necessity of the expenditure by means of a certificate issued by the body responsible under Land law or by the Land government. If one of the authorities responsible for the protection or preservation of monuments has granted him subsidies, the certificate shall also state their amount; if such subsidies are granted to him after the certificate has been issued, it shall be amended accordingly.
(3) Section 7h(3) shall apply mutatis mutandis.

§ Section 7h EStG Increased deductions for buildings in redevelopment areas and urban development areas

(1) In the case of a building located in Germany in a formally designated redevelopment area or urban development area, the taxpayer may, notwithstanding section 7(4) and (5), deduct up to 9 per cent in the year of construction and in each of the following seven years and up to 7 per cent in each of the following four years of the construction costs for modernisation and repair measures within the meaning of section 177 of the Building Code. Sentence 1 shall apply mutatis mutandis to production costs for measures which serve the preservation, renewal and functional use of a building within the meaning of sentence 1 which is to be preserved because of its historical, artistic or urban development significance and which the owner has undertaken to carry out in addition to certain modernisation measures vis-à-vis the municipality. The taxpayer may also claim the increased deductions in the year of completion of the measure and in the following eleven years for acquisition costs attributable to measures within the meaning of sentences 1 and 2, insofar as these were carried out after the legally effective conclusion of a compulsory acquisition contract or an equivalent legal act. The increased deductions may only be claimed insofar as the construction or acquisition costs are not covered by grants from redevelopment or development promotion funds. After expiry of the preferential period, a residual value shall be added to the construction or acquisition costs of the building or to the value replacing them; the further deductions for wear and tear shall be assessed uniformly for the entire building according to the amount resulting therefrom and the percentage applicable to the building.
(2) The taxpayer may claim the increased deductions only if he proves the prerequisites of paragraph 1 for the building and the measures by means of a certificate issued by the competent municipal authority. If he has been granted subsidies from redevelopment or development funds, the certificate shall also contain the amount thereof; if he is granted such subsidies after the certificate has been issued, the certificate shall be amended accordingly.
(3) Subsections (1) and (2) shall apply mutatis mutandis to parts of buildings which are independent immovable assets and to owner-occupied flats and to part-owned rooms.

§ Section 10f EStG Tax allowance for listed buildings used for own residential purposes and buildings in redevelopment areas and urban development areas

(1) The taxpayer may deduct expenses incurred on his own building in the calendar year of completion of the building measure and in each of the nine following calendar years up to 9 per cent as special expenses if the requirements of section 7h or section 7i are met. This applies only to the extent that he uses the building in the respective calendar year for his own residential purposes and has not included the expenses in the basis of assessment under section 10e or the Eigenheimzulagengesetz. For periods for which the taxpayer has deducted increased deductions of expenses in accordance with section 7h or section 7i, he may not claim deductions for these expenses in accordance with sentence 1. Use for the taxpayer’s own residential purposes shall also be deemed to exist if parts of a dwelling used for the taxpayer’s own residential purposes are provided free of charge for residential purposes.
(2) The taxpayer may deduct maintenance expenses incurred on his own building and not included in business expenses or income-related expenses up to 9 per cent as special expenses in the calendar year in which the measure is completed and in each of the nine following calendar years if the conditions of section 11a, paragraph 1, in conjunction with section 7h, paragraph 2, or section 11b, sentences 1 or 2, in conjunction with section 7i, paragraph 1, sentences 2 and 2, are met. This shall only apply insofar as the taxpayer uses the building in the respective calendar year for his own residential purposes and has not deducted these expenses in accordance with section 10e, paragraph 6 or section 10i. Insofar as the taxpayer uses the building during the distribution period for the purpose of earning income, the part of the maintenance expenses not yet taken into account shall be deducted like special expenses in the year of the transition to the purpose of earning income. Paragraph 1, sentence 4 shall be applied accordingly.
(3) The taxpayer may claim the deductions under paragraphs 1 and 2 only in respect of one building. Spouses for whom the requirements of section 26, paragraph 1 are met may deduct the deductions under paragraphs 1 and 2 for a total of two buildings. Buildings within the meaning of paragraphs 1 and 2 are deemed to be buildings for which deductions have been claimed under section 52(21), sixth sentence, in conjunction with section 51(1), no. 2, letter x or letter y, of the Income Tax Act 1987 in the version promulgated on 27 February 1987 (Federal Law Gazette I, p. 657); the same applies to deductions under section 52(21), seventh sentence.
(4) If several taxpayers are owners of a building, subsection (3) shall apply subject to the proviso that the taxpayer’s share in such a building shall be equal to the building. If a co-owner who has already deducted deductions for his share in accordance with paragraph 1 or paragraph 2 acquires an additional share in the same building, he may also claim the deductions in accordance with paragraphs 1 and 2 which are attributable to the additional share for measures carried out by him thereafter within the meaning of paragraphs 1 or 2. § Section 10e, paragraph 5, sentences 2 and 3 and paragraph 7 shall apply mutatis mutandis.
(5) Paragraphs 1 to 4 shall apply mutatis mutandis to parts of buildings that are independent immovable assets and to owner-occupied flats.

Existing real estate
Existing properties differ from monuments in several respects. They have already been renovated and rented out. On the other hand, only 2% or 2.5% of the building costs are deductible annually. For other buildings with completion after 31.12.1924, a depreciation rate of 2 % is applicable. For historic buildings – completed before 1 January 1925 – the depreciation rate is 2.5% of the building costs. In our selection process, we meticulously ensure that we only include properties in our portfolio that have no maintenance backlog.
Taxation of capital gains on:

Rented properties
As before, the personal income tax rate is due on rental income. The following applies to the sale of rented properties: After the expiry of the ten-year speculation period, gains from the sale remain tax-free. If the property is sold before the end of this period, the tax authorities demand the personal income tax rate. The date of the notarised purchase contract is decisive here. It should also be noted that if more than three properties are sold within five years, the investor is considered to be a commercial property trader.

Owner-occupied real estate
Capital gains realised on the sale of a property remain tax-free if the property was used exclusively for the investor’s own residential purposes in the year of sale and the two preceding years.

Note
This information does not constitute advice. In order to obtain binding information on tax aspects and the effects of a real estate investment on your personal tax situation, we strongly recommend that you also consult your tax advisor.