Sunday Business Post 07.07

Dilemma
My partner and I are considering buying an investment property in Berlin. What is the Berlin property market like at the moment and what are the tax and financial implications of buying an investment property there?
If we decide to use the apartment for personal use and to let it out for short breaks, could this be a problem?

Response
The Berlin property market saw price increases last year due to a strong level of investor activity. The Irish and Israelis were the main investors at the early stages, but British and Danish investors have also discovered the market in the last few months. Despite this, Berlin is still at a very early stage in the process of good market development and price increases. Investors from Spain, Italy, the United States and Australia have now begun to enter the market, but prices are still relatively low compared to London, Paris and New York.

Property is still cheaper than in Prague and Budapest, even though locals in these cities have a much lower average income than Germans, making it difficult for investors to sell to Czechs and Hungarians.

Another reason the Berlin market has room for growth is that Germans have not yet started to buy strongly in their own market. This will eventually happen and add to market and price growth comparable to other major capitals.

Leasing the apartment short-term so that you can also use it personally is not possible. Under German residential tenancy law, leases are signed for an indefinite period, making a termination impossible unless the tenant defaults on the rent, misbehaves or the landlord wants to move into the apartment himself. Regarding the tax implications of buying a property, apart from stamp duty, you don't pay tax on the purchase. The annual ground tax is paid by the landlord but reclaimed from the tenant over the course of a year as part of the ancillary costs (on top of rent), which are paid to the landlord each month.

At the end of each year, you will have to pay tax on the taxable income earned from the rent. Many investors are unaware that they can offset all of the costs related to the property purchase (notary, solicitor, land registry, travel expenses and so on) against their income, reducing their tax bill. Annual running costs, which are borne by the landlord, such as tax advice, maintenance, management costs, travel expenses and so on, can also be offset against income. In the first few years, the landlord should be able to create a virtual loss, which can be carried forward to the next tax year and result in no German income tax payments.

David O'Donnell is a solicitor with Dublin law firm Tom McGrath and Associates