Hesse buyers scramble to beat new property tax deadline

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Getting an appointment with a notary in Frankfurt these days is like trying to get a table at a long-since booked-out favourite restaurant. You’ll only get one if you’ve got VERY special connections. Part of the reason is the decision by the CDU-Green government in the state capital of Wiesbaden to increase the Grunderwerbsteuer or land transfer tax by from 5% to 6% with effect from August 1st, fully five months before it was due to come into effect on January 1st next year.

The result has been a scramble to finalise purchases and get them notarised before the August 1st deadline, or face the higher tax imposition. This is the second time in the last eighteen months that Hesse has raised its Grunderwerbsteuer, pushing it up from 3.5% at end-2012 to a punitive 6%, an increase of 70%. The difference between 2012 and now on a house or apartment price of €400,000 is the difference between €14,000 and €24,000 in extra tax – quite apart from the myriad other charges falling due on purchase, which in total can add on about 15% of the typical purchase price. Additionally, most new apartments have also seen hefty per sqm price increases in that time, so the actual amount due on most properties to the Hesse fiscus is higher.

Hesse CDU finance minister Thomas Schäfer justified the controversial move by saying this would help the state to reduce its overall borrowings from federal funds in 2014 – a plea which was immediately criticised by his political opponents. The earlier date is expected to bring in extra tax this year of €60m, and an extra €150m annually from 2015. The new rate brings Hesse up to the level charged by permanently-broke Berlin. Only Schleswig-Holstein with 6.5% and Saarland (also 6.5% from January 1st 2015) are charge higher rates.

The flood-gates were opened in 2006 when the federal government decided to decentralise decision-making to the individual states on the levying of the uniform 3.5% Grunderwerbsteuer. Since then every state bar Bavaria and Saxony has engaged in a seemingly endless race to raise the rate at every opportunity. Governments see it as an easy tax to raise, and everything they can drum up above the 3.5% level remains in their own budget, rather than being redistributed to other federal states through German Länderfinanzausgleich or payment-equalising system from the richer to the poorer states.

While Bavaria and Saxony have exercised restraint to date, it seems just a question of time until the 7% barrier is breached by neighbouring Länder, and the free-for-all could enter a renewed upward battle.