Investing into historically preserved real estate in Germany

Investing into historically protect real estate in Germany is one of the tax-advantageous options for investing into property abroad. It is a tax bonus thanks to the write-off of historically protected real estate (Section 7i of the income tax act). For a period of 10 years, owners can deduct 9% of the acquisition and restoration costs from their taxes and thus significant reduce their tax burdens.

Investors can deduct the costs for maintenance and modernisation from their taxes for 12 years: for the first 8 years it is 9% and for the next 4 years it is 7% of the restoration costs. Moreover, linear depreciation may be applied to purely acquisition costs.

How the tax bonus for owners works

The option of high deductions is a benefit particularly for owners: for 10 years they can deduct always 9% of the total acquisition costs and restoration costs (Section 10 of the income tax act), which are “essential to maintain the building as an architectural monument or required for its purposeful use” (Section 7(1) of the income tax act). The state thus provides decent contributions both to the purchase price and to restoration measures. However, this applies under the condition that the buyer did not receive any contributions for individual housing construction for the said amounts.

Simplified calculation example:

A single individual without children with an annual income of 50,000 € (gross) buys a historically protected two-room apartment in Germany with an area of 74 m2. The building is historically protected, restoration begins in December 2011.

  • Purchase price incl. secondary acquisition costs and restoration costs: 216,000 €
  • Of which restoration costs: 144,106 €
  • Depreciation on the restoration share (9% p.a. of 144,106 €): 12,970 €
  • Annual tax burden before purchasing the property: 13,560 €
  • Newly taxed income (income minus deduction): 36,380 €
  • Paid tax (after purchasing the property): 8,160 €
  • Annual tax savings: 5,400 €
  • Monthly tax savings: 450 €
  • Effective tax savings after 10 years: 54,000 €

How the tax bonus works for investors

For a period of 12 years, investors can deduct costs for maintenance and modernisation from their income tax. During the first 8 years, they can apply 9% of the costs for restoration, and for the following 4 years they can apply 7%. Moreover, they can apply linear depreciation for the acquisition costs excluding costs for restoration. This linear depreciation for old buildings that were built before 1925 is 2.5% for 50 years. The benefits of this very generous tax saving model can be used particularly by the owners of estates and recipients of two incomes.

Simplified calculation example:

A married man with one child and an income of 60,000 € (gross) buys a historically protected three-room apartment in Germany with an area of 90.15 m² and rents it out for an advantageous price of 8.50 €/m².

  • Purchase price incl. secondary acquisition costs: 262.000 €
  • Of which restoration costs: 174.720 €
  • Annual tax burden before purchasing the property: 12.570 €
  • Average deductible costs annually (depreciation of the restoration share, depreciation of the old building, negative premium, insufficient coverage from income, from rent and financial interest, other costs for advertising) 17.100 €
  • New taxed income on average (income minus deductible costs): 42.900 €
  • Average annual tax burden after purchasing the property: 6.500 €
  • Average annual tax savings: 6.100 €
  • Average monthly tax savings: 510 €
  • Effective tax savings after 12 years: 72.700 €

In order to gain an overview of the possibility of obtaining a “historical write-off”, we have compiled a simplified calculation example for you. Its purpose is only to clarify the impact of writing off historical buildings and it certainly is not a recommendation or tax advice.

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