Monument real estate as an investment: What needs to be considered?

What needs to be considered?

We have probably all had at least one experience similar to this at some point in our lives, whether it be the feeling of standing in awe and admiration in front of a castle that has been rebuilt according to historical models and experiencing the spirit of the past, or the feeling of strolling through a lively old town and admiring the charm of proud merchants’ houses that date back to the times of the Hanseatic League.

All of this is made possible due to the players involved demonstrating both the willingness and the associated commitment to conserve culturally and historically significant buildings for future generations. There is a strong emphasis on preserving historical landmarks in this location. It guarantees that the framework conditions for conserving architectural cultural assets are adhered to. The law outlines these conditions to protect historic buildings and monuments and is managed by the authority in charge of monument protection.

An overriding public interest is the most essential requirement for a building to meet to be granted the status of “listed building.” The age by itself is not a deciding factor. The categorization shields the building against the possibility of being demolished or subjected to structural modifications. The definition of particular measures and the carrying out of those measures is the duty of the many federal states that make up Germany, for example. In addition to the United States, other nations, such as Spain, Portugal, Italy, and France, each have regulations, which may or may not be the same as ours.

What requirements should a monument property meet?

In Germany, a property is referred to as a listed property or an architectural monument if entered into the official list of monuments. It is, after that, included on the list. In the context of the current architectural preservation practice, they are structures that exemplify the time-typical style of their respective eras. As a result, it is architecturally and aesthetically deserving of preservation. The preservation of monument real estate, considered a part of the cultural heritage, is supported financially by the state through subsidies. For instance, if a property owner wishes to carry out remediation activities, they may be eligible to claim tax advantages for this particular purpose. Nevertheless, very stringent regulations must be followed, which have been set down by the Monuments Office and are mandated by law. However, listed properties may also meet the criteria for investment properties and may be owned for investment.

The significance of monument protection for the real estate market

Structures like castles, fortresses, monasteries, old manor homes, half-timbered houses, windmills, water towers, and historically significant residential or commercial structures are frequently eligible for monument protection. Anyone considering purchasing such a building should educate oneself in advance about the repercussions of doing so and make an informed decision. This is because protection comes with various rules and laws about repair and usage, but in exchange, it provides fascinating tax opportunities and benefits. In addition, the acquisition comes with the responsibility of upholding the building’s upkeep, which may be required by the municipal authority in charge of preserving historic buildings.

Tax incentives for investors and private users

There are numerous motivating factors that can lead to the buying of a home that is advertised for sale. One of the reasons could be the aspiration to acquire a one-of-a-kind structure to bring it back to its previous splendour through various forms of restoration. Both idealism and passion are important factors in this scenario, as are the available financial resources. However, investors are also on the lookout for these unique houses in desirable locations so that they can rent them out for a profit in the long term after the properties have been remodelled.

The state rewards the costs associated with rehabilitating a listed property, which is typically much more than the costs associated with routine renovations, with tax incentives that can sometimes be quite significant. Anyone who invests in renovating a property with the intention of afterwards renting it out can deduct the renovation costs as income-related expenses over twelve years. Because of this, it is possible to completely recoup maintenance expenses by utilizing the available tax benefits.

It is possible to deduct nine per cent of the costs associated with upkeep and renovations over ten years if the new owner plans to live in the property themselves after it has been sold. That constitutes ninety per cent of the investment when all is said and done.

The acquisition expenses, which can be deducted with varied depreciation periods based on the year the building was constructed, are a cost that is incidentally associated with all rental properties.

Can the purchase of a listed property be worthwhile?

Buyers and investors are likely to find the tax benefits discussed before appealing. Be wary, though, if you plan to make a profit off the remodelled property after only a small amount of time has passed since the work was completed on it. The subsequent purchaser won’t be able to take advantage of the tax benefits, therefore he will base his purchase decision on the current market price, which may result in a negative profit. It is recommended that the property be owned for at least fifteen years to avoid this.

In most circumstances, rental properties listed have a high degree of attractiveness. As a result, a higher rental revenue is attainable when the property is situated appropriately. The demand for living space is expected to continue high in attractive cities, and there is a decent chance of finding financially stable tenants looking for something unique in these places.

Listed dwellings are also frequently located in areas with poor structural integrity. Despite the area’s stable value, it is extremely difficult to make a profit on a sale there due to the low prices of both houses and land. There is a good chance that there will not be the same kind of value growth common in regions that are more appealing from an economic standpoint.

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Buying up monument property as an investment - Important!

For investors or investors, however, it is important to know that monument properties differ very clearly from the so-called renovation properties. In the case of redevelopment properties, the owner or investor has as much freedom as possible with regard to the refurbishment measure, whereas in the case of a monument property, the design and the visual representation may not be changed.

While it is true that redevelopment properties with comparable tax advantages are also promoted, the state has a completely different purpose. A refurbishment property is not about being able to preserve the old-historical building structure in its present form. Rather, refurbishment properties are about being able to remedy urban design problems. Unlike a monument property, the repair of a refurbishment property is subject to considerably lower requirements.

Why are heritage properties of interest to investors?

Germany has made a commitment to promote the preservation of listed properties. For this purpose, the tax law provides for the tool of the Monument AFA, the so-called deposition for wear and tear. With this means, investors as owners of heritage properties can claim significant tax write-offs to ensure the renovation and preservation of the listed properties. In this context, however, it is important to mention that the tax depreciation may only be used for the preservation of the listed property. Since a renovation of a monument property involves a lot of effort and also very expensive assets, the state gives the owner the possibility of depreciation. If the listed property is rented out or even used commercially, this gives the owner the right to depreread the production or acquisition costs of the listed building on a linear basis.

The amount of possible depreciation varies and depends primarily on the age of the monument property. For buildings built before 1925, the depreciation option is 2.5 over a 40-year period. For buildings built after 1925, the amount of depreciation is 2 over a 50-year period.

If an owner owns a listed property that has been officially recognised as such, there is the possibility of deducting the tax of renovation costs to a particular extent. The amount of the tax advantages depends on whether the monument property has been declared for its own use or whether it is an investment object with the purpose of resale. For investors, it is possible to have the complete restructuring costs depreused for tax purposes. In the window of the first eight years after the acquisition of the listed property 9 and in the following four years 7 of the renovation and modernization costs can be depreciated for tax purposes. In addition, there is the possibility of linear depreciation, which refers to the pure acquisition value of the monument property. Owners who use their listed house can deprecrate 90 of all renovation or renovation costs for tax purposes. This applies for a period of ten years after the purchase of the monument property. However, the possibility of linear tax depreciation is no longer possible in the case of self-use. Of course, the use of tax advantages is also subject to strict conditions. If an investor or owner of a listed property fails to meet this requirement, this means that all depreciation claims may be completely lost.

What are the conditions for the tax advantages?

The most important prerequisite for the use of the tax advantages is that the building has an official recognition as a monument property and has accordingly been entered in the regional list of monuments. The other prerequisites are:

Planned refurbishment measures must first obtain approval from the Office for the Protection of Monuments.
The notarial purchase contract must necessarily have been signed and concluded before the start of the planned remediation measure.
A tax prior certificate must be obtained by the investor before the start of the renovation or refurbishment measures. If the measures are already in progress, no certificate may be issued, resulting in a loss of entitlement.

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What is the demand for heritage properties?

The attractive tax advantages have led to a very constant demand for listed properties on the German market. The number of existing properties available on the market has been significantly reduced by this demand, which has of course led to an increase in the price. It is repeatedly emphasized that in the so-called old federal states there are hardly any more available monument properties. In the new federal states, however, these listed properties still exist and thanks to constant demand, these listed properties have experienced an immense increase in prices. For all the advantages that a listed property offers to the investor, the focus should also be on the risks.

The risks of listed properties

High demand leads to massive price increases in a free market, which of course has a noticeable effect on the rental yield on rented properties. So-called black sheep, which are still present by developers, must of course first be explored from the existing offer. These black sheep lure their customers with sometimes enormously dubious yield calculations and, moreover, the refurbishment costs have to be calculated precisely. These costs should not be underestimated and some providers submit overvalued calculations in order to be able to sell listed properties profitably to the customer.

If the listed property is to be sold, it is imperative that the time limit is observed. If a listed property is sold prematurely, all depreciation claims are thus released. This has a negative effect on the pure value of the monument property, as the tax advantages are an integral part of a purchase price. In the case of a purchase with debt capital in particular, it should also be borne in mind that prepayment compensation must be paid to the banks or the investor, and the speculative tax, which is due in the event of an early sale within a period of ten years, must not be disregarded. For this reason, investors who are interested in the topic of monument real estate should carry out their own examination of the property in advance or secure this examination by means of an expert opinion.

Monument properties can offer good investment opportunities. Real estate is still considered a constant in Germany and a listed property can be considered a premium plus property. However, in order to be able to obtain all possible advantages from the monument property and thus to achieve an economically comprehensive use, numerous prerequisites are required. It is therefore important to make a very precise cost-benefit calculation in advance and, in addition, to carefully check your own financial possibilities. Especially when a listed property with debt capital is to be acquired by the bank as an investment, the realities of the economic market must necessarily be taken into account in this calculation. The development of interest rates plays an important role here, as does the movement of the real estate market. For this reason, a monument property as an investment is not a good alternative for every investor. Find out more about real estate financing options and how we can help you with this.

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