Rescission of the Speculation Period: a Warning Shot from Austria

Published on 2012/03/26

Austria intends to rescind the ten-year speculation period for real estate as at 1 April 2012. So far, the law in Austria – and Germany – has specified that disposals of privately held properties are tax exempt after an ownership period of ten years. Now, our Austrian neighbours have decided to end the practice. In the future, all property sales will be subject to a tax rate of 25% regardless of the length of ownership. After the expiration of ten years, the tax rate will decrease by an annual 2.5 percentage points.

The transition will be eased by the following temporary arrangement: properties no longer subject to the tax entanglement rule (meaning properties acquired before 1 April 2002) will be subject to a future text rate of 3.5% (on the sales proceeds). Any property acquired after that date, however, will be subject to the new regulation.

I have worried for a long time that the issue will be put back on the agenda during the next parliamentary term in Germany, too. The Austrian trailblazing will encourage German politicians to move ahead with an analogous reform. Regardless of the development in Austria, I have considered the chances that Germany would leave the current legislation in place as very slim indeed.

Could the re-enactment in Austria serve as a model for German lawmakers? What – from a property owner’s perspective – would be the negative and what the positive aspects of the Austrian arrangement?

The reduced tax rate of 25% could be rated as a positive thing. So far, property sales in either country have used to subject to the personal income tax rate. For Germany, I expect the latter to be raised to at least 50% in the top bracket during the next parliamentary term. Another favourable aspect of the new regulation in Austria is the sliding-scale annual reduction in tax rate once the ten years have expired. I should like to seize this opportunity to recall that Social Democrats and Greens contemplated a tax rate of just 15% on capital gains as they debated whether to change Article 23, German Income Tax Act, and to rescind the speculation period in 2002. At the time, the re-enactment was stopped in the Bundesrat upper house by the opposition of German states with Christian Democrat governments. But the old draft bill should be unearthed again, because it was not all that bad. It included, for instance, a moderate grandfather clause.

The one thing I find problematic about the re-enactment in Austria is that only such legacy cases are (to some extent) protected that are no longer subject to tax entanglement anyway. And even these are not fully protected. Would the same thing be conceivable in Germany, too?

Let me remind you of the ruling handed down by Germany’s Constitutional Court of Justice that concerned the legitimacy of the extension of the speculation period from two to ten years as enacted by the legislature in 1999, a case that had been referred to the court by the Federal Fiscal Court. This ruling will be the guideline for any amendment to Article 23 of the German Income Tax Act that German lawmakers might pursue. The Constitutional Court of Justice deemed it – regrettably – permissible to impose taxation of capital gains on properties whose ownership was still subject to the speculation period. However, it deemed it impermissible to tax the capital gains of properties that had been sold after the end of the speculation period. In Germany, there is therefore reason to worry that an amendment to Article 23, Income Tax Act, will protect only those properties whose seller owned them for no less than ten years. A taxation of capital gains from properties owned longer than the speculation period would, however, be illegal in Germany pursuant to the ruling by the Constitutional Court of Justice.

The interest groups representing the real estate economy should definitely prepare for the likelihood that the lawmakers will take on this issue in the upcoming parliamentary term. It would be naive to believe that the current arrangement will remain in place and to ignore signs suggesting otherwise. Parties in favour of rescinding the speculation period include not only the Social Democrats, Greens, and Leftists, but unfortunately the Christian Democrats, too. That the Liberals oppose the amendment will no longer play a role in the next parliamentary term.

One should start immediately to gather sound arguments for a transitional arrangement more moderate than the ruling handed down by the Constitutional Court of Justice and the arrangement enacted in Austria.

The objective should be to fight for a temporary arrangement that focuses on the time at which a given property was acquired. I would argue as follows: why should property owners get a harsher treatment than owners of securities or life insurances? When the lawmakers rescinded the speculation period for securities some years back, the law exempted all those securities from the new regulation that had been bought prior to its effective date. It was the same story when the tax-exempt status of life insurances was rescinded. Here, the temporary arrangements were based on the time of acquisition and not on the time at which the securities ceased to be subject to tax entanglement.

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