Germany: Real Estate Transfer Taxes Are a Burden on Real Estate Sellers in Particular

Although real estate transfer taxes are paid by the buyers of a property, it is above all the sellers who effectively bear the burden. This is the result of a new study by researchers at the ifo Institute published on Monday.

In reality, real estate transfer taxes lead to a reduction in real estate prices. While it is the real estate buyers who must pay the tax, at the same time they benefit from lower purchase prices for real estate – which is a burden on the real estate sellers. “Since real estate transfer taxes are payable by the buyers of a property, it reduces their willingness to pay,” says ifo President Clemens Fuest, one of the study’s authors.

In fact, the price drop is even greater than the additional tax burden on a single transaction: if the real estate transfer tax rate increases by one percentage point, real estate prices fall by an average of around 3.5 percent. This can be explained by the fact that any future resale will again incur real estate transfer tax. As a consequence, real estate prices fall more sharply than the real estate transfer tax take increases. “The shorter the holding period of a property, the greater the decline in the price of that property,” Fuest continues. This is because the more often a property changes hands, the more frequently it is also subject to real estate transfer tax. In addition, higher real estate transfer taxes can drive buyers with little equity out of the market, which also depresses prices.

For the study, the researchers evaluated data from nearly 18 million properties offered for sale between January 2005 and December 2018. The data set includes condominiums, single-family homes, and apartment buildings all over Germany. The data was collected from a total of 140 different sources, including online real estate portals and regional and national newspapers, and made available to the ifo Institute by F+B, a consulting firm for the real estate market.

The real estate transfer tax is levied on the purchase of real estate, with the amount determined by the price of the property. In 2018, it generated revenue of around EUR 14 billion, which flows to Germany’s Laender. Since 2006, the Laender have been able to determine the level of the tax rate themselves; before that, a uniform nationwide rate of 3.5 percent applied. In fact, all the Laender except Bavaria and Saxony have since increased the tax rate, in some cases several times. The highest rate is currently found in Brandenburg, North Rhine-Westphalia, Saarland, Schleswig-Holstein, and Thuringia, where it is 6.5 percent.