Value Added Tax

Value Added Tax in the property sector

Value added tax is a key issue in the field of property investment. It applies to both private and commercial property purchases and sales. In Germany, property purchases are often subject to value added tax, which presents investors and buyers with specific challenges.

What is VAT?

Value added tax (VAT) is a general tax on goods and services, governed in Germany by the Value Added Tax Act. As a rule, VAT is collected by the seller and paid to the tax office. It is particularly relevant in the property sector, as the purchase of land and property is often subject to VAT.

Value-added tax on property purchases

In the context of property purchases, VAT may be payable in various ways:

• New-build projects: The sale of new-build properties is generally subject to VAT.
• Commercial tenancy agreements: Landlords may opt to charge VAT on commercial tenancies.
• Sale of second-hand properties: The sale of second-hand properties is exempt from VAT, provided that the option to charge VAT is not exercised.

Calculation of VAT

VAT is generally levied at a rate of 19 per cent on the net price of the property being purchased. In special cases, such as certain social institutions or the construction of social housing, the reduced rate of 7 per cent may apply.

What does input tax deduction mean?

Input tax deduction is an important aspect of VAT, as it enables businesses to deduct the VAT they have paid on goods and services from the VAT liability they owe to the tax authorities. This is particularly relevant for investors who invest in commercial property and are able to claim input tax.

Tax implications when purchasing property

When purchasing a property, investors should take into account the potential tax implications of VAT. The decision as to whether or not to apply VAT to a property can therefore have significant financial implications.

VAT and property financing

Property financing is also affected by VAT. Investors should ensure that they include the total financing costs, including VAT, in their calculations. When assessing returns and cash flows, the revenue generated by the input tax deduction should be taken into account.

A clear example on the topic: VAT

Imagine an investor purchases a new residential building for €500,000 net. As this is a new-build project, VAT at a rate of 19 per cent is payable. The total cost therefore amounts to 595,000 euros. If the investor has acquired the building as a property to be let on a commercial basis, they could deduct the VAT paid at a later date as input tax. If the property were let for a net rent of 10,000 euros per month, the investor would also have to pay VAT on the rental income. These complex tax considerations highlight how important it is to examine VAT carefully in the property sector.

Conclusion

VAT plays a crucial role in the property sector and should be carefully considered by investors. Given the various regulations and potential tax advantages, it is advisable to seek comprehensive advice from a tax expert in order to make the best decisions when purchasing property.