Tax challenges in times of upheaval
The changed market conditions also have indirect consequences for the tax structure of investments in retirement or investment apartments. Tax consultant Ferhat Hofmann explains the most important points that investors should pay attention to.
Mr. Hofmann, the sharp rise in interest rates and high inflation are changing the investment model of the investment apartment. How does this affect tax optimization?
The most obvious change is the sharp rise in financing costs. In order not to slip into hobbyism, but to achieve an overall taxable profit, an investor must therefore raise proportionately more equity capital today than in years in which borrowed capital could be raised more cheaply. This is not always offset by the slightly higher yields that are currently possible. In order to minimize the risk of hobbyism, an equity share of around one third is advisable.
What would otherwise be the consequence?
If no total taxable profit is achieved and the business is a hobby for tax purposes, the input tax claimed on the purchase must be repaid and any initial losses must also be taxed. Since the start of the rise in interest rates, the general conditions have changed, which is why it is ad- visable to include a higher buffer reserve in the tax forecast. Alternatively, it is also possible or even sensible for some properties to waive input tax on the purchase and to rent out with the small business regulation (maximum turnover from renting and leasing of EUR 35,000 net per year) without VAT and with higher optimized rents.
Does this mean forgoing a significant portion of the net return?
This varies depending on the location. Particularly in (very) good locations, where the basic cost share is higher, waiving the input tax de- duction only has a minor impact on the net yield, as VAT is only incurred on the construction costs for many properties. In return, a tax risk and a considerable organizational effort are eliminated, as no ongoing VAT registration is required, for example. In addition, a resale can be arranged more quickly and flexibly, as there is no need to pay VAT. It is important that anyone buying several investment apartments seeks advice in advance about other options, including tax optimization.
What are the possibilities?
For example, it is worth thinking about owning your own real estate company if you have around five apartments or an annual rental profit of around EUR 10,000. A simple form would be a partnership such as a co-owners‘ association, which is particularly useful if there are people with very different incomes in a family association and the income from the investment property can be taxed accordingly more favorably. An LLC is more costly but even more interesting from a tax perspective, as the combination of corporation tax and capital gains tax, if you are in the highest progression bracket, can ultimately be more favorable than taxation as part of income tax. Depending on your personal situation and investment objectives, other entities may also have special advantages. It is best to find out the right option in a consultation with a tax advisor.
Ferhat Hofmann, MA
Managing Director of FerTax Steuerberatungs GmbH & Co KG
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