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German Government Moves ahead with Special Depreciation Allowance and Rent Freeze

04.

October 2018

In the run-up to the housing summit that is scheduled to take place at the German Chancellery on 21 September, the governing Grand Coalition agreed on two housing policy draft bills. The Federal Government laid the ground for a special depreciation allowance in rental housing construction and passed a draft bill that seeks to tighten the rent control measure called the “rent freeze” (German “Mietpreisbremse”) and to cut back the modernisation allocation for landlords. Particularly the planned revision of the rent freeze is subject to intense debate. The Federal Government would like to oblige landlords to disclose the previous rent level of a given flat whenever it is cited as the reason for raising the rent beyond the permissible level under rent control regulations. The law would also mandate that landlords who claim exceptions from the rent freeze, for example a preceding modernisation, to justify higher rents need to disclose such circumstances as well. This is supposed to make it easier for tenants to judge whether or not their landlords are following the rent freeze regulations (source: haufe.de).

Constitutional Court Ruling on Rent Freeze Pending

Critics of the endeavour cite the observation that the rent freeze has failed to help resolve the housing shortage and that tightening this rent control measure would therefore be misguided on the one hand. Angela Merkel herself declared the rent freeze a flop during last year’s general election campaign (source: faz.net). On the other hand, the rent freeze has drawn criticism because it would be tightened before the Constitutional Court of Justice has finished examining the constitutionality of the instrument as such. Add to this that the coalition agreement of the Federal Government actually stipulated that the rent freeze would be checked for effectiveness. But the decision to make the tool more restrictive yet was made prior the planned effectiveness review and ahead of the ruling by the Constitutional Court (source: zia-deutschland.de, ivd.net). Parallel to the plan to tighten the rent freeze, the governing coalition decided to lower the modernisation allocation from eleven to eight percent. Moreover, rent hikes due to modernisations will be capped at a maximum of three euros per square metre over a six-year period.

Special Depreciation Allowance Gets Flak

The special depreciation allowance in rental housing construction, which will equal five percent, is to be granted over a four-year period over and above the straight-line depreciation. The special depreciation allowance deduction will benefit rental housing planning applications filed between 31 August 2018 and 31 December 2021. However, the acquisition or productions costs must not exceed 3,000 euros per square metre to remain eligible for the program. The basis of assessment will be capped at 2,000 euros. The total tax advantage will be limited to a maximum of 200,000 euros. It is this latter aspect that has drawn the harshest criticism by real estate associations, which argue that the 200,000-euro cap will restrict the subsidy to smallish construction projects (source: haufe.de). Michael Voigtländer of the IW Economic Institute pointed out moreover that the lack of building land in Germany’s major cities is the most pressing issue and that tax incentives like the special depreciation allowance deduction are unlikely to remedy the housing shortage in any serious way (source: fr.de).

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