Tax Benefits

Tax benefits

Under certain conditions, it is possible to accrue tax benefits by purchasing a listed property. The rules are laid down in the German Income Tax Act (EStG). Purchasers are able to reduce their individual tax liability by claiming for depreciation and expenses, thus turning property purchase into a method of tax mitigation, as well as a way of achieving rental income.

Listed building depreciation provides the possibility of tax relief

Renovation and modernisation measures must be carried out in order to preserve a heritage-listed building. Providing these are approved by the authorities, the purchaser is able to offset costs against tax. According to Sects. 7 h/i EStG, it is only buildings in redevelopment areas, urban development areas and listed buildings and monuments that qualify for the relevant depreciation rates. Buyers of heritage-listed buildings can depreciate 9% of their renovation costs in the year of acquisition and in each of the following seven years. At the end of this period they can use a depreciation rate of up to 7% for a further four years, making it possible, in the case of rented listed buildings, to offset costs fully against tax. Where the purchaser uses the property himself, the rate of depreciation is reduced to a maximum of 9 per cent over a total of 10 years. In contrast to other types of property, it is possible to claim depreciation even if the property is not rented out.

Deduction of mortgage expenses in tax returns

Where the property purchase is funded by means of a loan, annual interest charges are incurred which can be deducted as a property expense in the purchaser’s tax return. Depending on the extent of their individual tax liability, they are therefore able to mitigate tax to maximum effect. Mortgage costs are classed as administrative expenses, which can be used to reduce the amount of tax payable on rental income. It is possible, especially during the term of the loan, that property-related expenditure can exceed revenue, thus resulting in a notional loss and freedom from any tax liability on rental income. This is based on the surplus principle under which administrative expenses are deducted from revenue before the amount of tax payable is calculated. As a result, it is only profit income that is actually taxable.

Property depreciation tables can also be used where the property is rented out.

In order to make use of the linear depreciation facility, the property must be rented out. Where the property was built after 1925, it is possible to set off 2 per cent per annum of the historic fabric of the building for a period not exceeding 50 years. In the case of older properties built prior to 1925, the relevant depreciation rate is 2.5 per cent over a maximum of 40 years.