Value-Added Tax (Construction)

Value-Added Tax (Construction) - Value-added tax (VAT) plays a central role in the construction and real estate sectors. The standard tax rate is 19% and applies to construction services, tradespeople’s invoices, architects’ fees, and the purchase of new buildings from developers. Land sales between private individuals, however, are generally exempt from sales tax (Section 4 No. 9a of the German Sales Tax Act) - instead, real estate transfer tax applies in these cases.

Sales Tax on New Construction and Renovation

All tradesman and construction services are subject to 19% sales tax. When purchasing a new building from a developer, sales tax is included in the purchase price - the gross purchase price is stated in the purchase agreement. For renovation projects, sales tax applies to each individual contractor’s invoice. For private individuals, sales tax is purely a cost factor, as they are not entitled to input tax credits. Commercial landlords may, under certain conditions, opt for VAT and claim the input tax credit.

VAT is a particularly significant cost factor for larger construction projects. Someone who has a house renovated for 300,000 euros net pays 57,000 euros in VAT-an amount that is fully incurred as a cost for private individuals. Commercial investors, on the other hand, can reclaim this input tax if they have opted for VAT, which significantly impacts the economic difference between private and commercial real estate use.

Option to Opt for VAT in Rental Transactions

Rental for residential purposes is generally exempt from VAT (Section 4 No. 12 UStG). In the case of commercial leasing, however, the landlord may opt for VAT (§ 9 UStG) if the tenant uses the property for purposes subject to VAT. The advantage: The landlord can deduct the input tax from construction and renovation costs. The prerequisite is that at least 95% of the leased space is used for purposes subject to VAT.

However, the decision to opt in binds the landlord for the long term: Under § 15a UStG, a correction period of ten years applies. If, within this period, a tenant switches to a non-VAT-liable company, the proportionate input tax that has not yet been “used up” must be repaid. This regulation makes careful planning of the tenant structure an essential component of the tax strategy.

Sales Tax on Real Estate Purchases - New Construction vs. Existing Properties

When purchasing a new building directly from the developer, sales tax is included in the purchase price. In this case, only the land portion is subject to real estate transfer tax, not the building value-an important detail that must be taken into account when calculating total costs. The developer lists the sales tax separately in the purchase agreement.

When purchasing an existing property between private individuals, no sales tax is incurred. Instead, real estate transfer tax applies to the entire purchase price (3.5% in Bavaria). However, if the seller is a business and the buyer is an entrepreneur purchasing for commercial purposes, it may also be possible to opt for sales tax under certain circumstances-a situation that is complex from a tax law perspective and always requires consultation with a tax advisor specializing in real estate.

Practical Tip for Property Owners in Nuremberg

We recommend that commercial landlords in the Nuremberg metropolitan area carefully consider the VAT option-especially before major renovations. With a comprehensive renovation costing 300,000 euros net, the input tax deduction can result in savings of 57,000 euros. However, the option is binding for at least the adjustment period (10 years for real estate), and if a tenant changes to a non-VAT-liable tenant, there is a risk of a pro-rata input tax adjustment.

In Nuremberg, mixed-use properties-ground floor commercial, upper floors residential-are particularly widespread in the city center and around Karolinenstraße. Special caution is required here: The option can only be declared for the commercial portion; it does not apply to the residential units. An incorrect demarcation can lead to additional payments and interest. Consult a tax advisor in advance.

Frequently Asked Questions

Is VAT applicable to the purchase price of a used property?

No. The sale of existing properties between private individuals is exempt from sales tax. Instead, real estate transfer tax applies (3.5% in Bavaria). Only when purchasing a new construction directly from the developer is sales tax included in the purchase price-in that case, real estate transfer tax applies only to the land portion.

Can I deduct the VAT on tradespeople’s services?

For private individuals, there is a tax credit under Section 35a of the Income Tax Act (EStG): 20% of the labor costs (excluding materials) for tradespeople’s services can be deducted from income tax-up to a maximum of 1,200 euros per year. The VAT on the labor portion is part of the deductible costs. Only businesses subject to sales tax are entitled to a full input tax deduction.

What is the reverse charge procedure for construction services?

Under the reverse charge procedure (Section 13b of the German Sales Tax Act), it is not the contractor providing the service who owes the sales tax, but the service recipient - provided that the recipient is themselves performing construction work. This procedure typically applies to general contractors and property developers, not private building owners. It prevents VAT fraud in the subcontractor chain.

What VAT regulations apply to photovoltaic systems on real estate?

Since 2023, a zero tax rate (§ 12 (3) UStG) has applied to the supply and installation of photovoltaic systems on residential buildings. This means: Private individuals do not pay VAT on the PV system, but they also cannot claim input tax. For systems on commercially used buildings, the standard tax rate of 19% continues to apply. This regulation has significantly increased the appeal of photovoltaics on residential buildings since its introduction.

Sales Tax and the Purchase of New-Construction Apartments: Calculation Example

The impact of sales tax on new-construction purchases is particularly noticeable for private individuals because it increases the total purchase price-without any possibility of a refund. Anyone purchasing a new-construction apartment for a gross price of 500,000 euros pays 19 percent sales tax on the building portion (not on the land portion). With a land portion of 25 percent, 375,000 euros of the building portion is subject to tax: The included sales tax amounts to 375,000 ÷ 1.19 × 0.19 ≈ 59,870 euros. The buyer bears this cost-an amount that must always be factored into the total cost calculation and when comparing with existing homes.

Commercial buyers who can opt for VAT treatment see things differently: They can reclaim this input tax, which reduces the effective purchase price for them by the same amount. This explains why commercial investors are often willing to pay higher purchase prices for new-build properties than private individuals-the tax system structurally favors them. We recommend that private investors in the Nuremberg metropolitan region always explicitly calculate the tax cost difference when comparing new construction and existing properties and include it in their return calculations.

Back to the Real Estate Glossary.