Tax depreciation allowances for new rental housing construction have been approved

"Setting the right incentives"

Tax depreciation allowances for new rental housing construction have been approved

To relieve pressure on the housing market as quickly as possible, the German Federal Cabinet approved a special depreciation allowance for the construction or purchase of rental apartments on February 3rd of this year as an incentive for private investors. For new buildings, the building permit application must be submitted by December 31, 2018. Furthermore, the newly constructed or acquired condominiums must be rented out for residential purposes for at least ten years. "The housing market is strained in some regions. There is a particular shortage of apartments in major cities. Added to this is the influx of many refugees. We must now create the right incentives," explained Federal Finance Minister Wolfgang Schäuble. Instead of increasing the standard depreciation allowance to sustainably expand the construction of new rental apartments, this temporary tax bonus provides quick, short-term savings. In the year of acquisition or construction, as well as in the following year, an additional ten percent can be deducted annually on top of the regular two percent standard depreciation allowance. In the third year, this increases to up to nine percent of the assessment basis. Overall, investors can therefore claim up to 35 percent of the eligible acquisition or manufacturing costs as tax deductions.

 2,000 euros per square meter can be deducted

Since only housing that is affordable for middle and lower income groups is to be subsidized, a construction cost ceiling of €3,000 per square meter of living space must be observed. Of this, a maximum of €2,000 per square meter is tax-deductible.

For example, someone investing €350,000 (including ancillary costs such as real estate agent commission, notary fees, and property transfer tax) in a 100-square-meter apartment in Stuttgart can, after deducting the land price, have a maximum assessment base of €300,000. Of this, they can deduct €105,000 over the first three years. With a top tax rate of, for example, 33.3 percent, this results in tax savings of €35,000. This special depreciation allowance is available until the end of 2022. There are also location-related conditions: The eligible area includes municipalities where the average rent is at least five percent above the national average. This is determined according to rent levels IV to VI of the housing allowance system, with level six being reached in major cities and university towns such as Hamburg, Munich, Cologne, Stuttgart, Frankfurt, and Wiesbaden. Areas with rent control (§556d BGB) and with a reduced cap (§ 558 paragraph 2, sentences 2 and 3, BGB) are also eligible for funding.

Criticism of the new tax-saving model

The state finance ministers were initially skeptical of the proposed legislation. The property owners' association "Haus & Grund" also fears that the new tax-saving model will not encourage long-term investment, but could instead attract speculators who would secure short-term tax savings and then sell the property again after the speculation period.

Sources: Federal Government.de, Federal Finance Ministry.de, Hausundgrund.de, Handelsblatt, Frankfurter Neue Presse, German Civil Code (BGB).