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The Home Ownership Subsidy Law (Eigenheimzulagengesetz) is often associated with the 1996 Tax Act, but it is in fact the most important part of a distinct piece of legislation which completely transforms the system of public support for persons buying or building a home of their own. The Act for Restructuring the System of Fiscal Aid for Home Ownership, which received approval from the German Bundesrat on 24 November 1995 after being passed by the Bundestag the week before, replaces a system of home ownership supports based primarily on tax deductions with one based primarily on direct subsidies. Providing support in the form of tax deductions is objected to by its critics on the grounds that the economic benefit of a tax deduction is greatest for persons with high incomes and vice versa.

While too complicated to be explained in few words, the present system has as its central aspect a deduction of a certain percentage of the cost of a personal home (including all forms of multiple family dwellings) each year for eight years. The maximum deduction over this period is DM 145,200 for new homes and DM 66,0000 for used homes. The present system does have fairly stringent upper income limits which, if exceeded in a given year, lead to a denial of deductions for that year, but beneath these limits the real economic benefit derived from the deductions can vary enormously, with high-income taxpayers profiting most. This is easily imagined when one remembers that personal tax rates in Germany at present vary from around 20 % to almost 57 % (including solidarity surcharge but not church tax).

In accordance with an agreement reached in the Finance Committee on 26 October 1995 between the Government and the Opposition in the lower house of the German parliament (the Bundestag), the home ownership tax incentives under the current sec. 10e EStG will cease to apply to homes purchased after the end of this year (effective date of purchase contract) and to self-constructed homes as to which construction has not commenced by the end of this year (date of application for building permit). Persons applying for a building permit or signing a purchase contract from 27 October 1995 till the end of this year can choose between the present incentives under sec. 10e EStG and the new system of home ownership subsidies which takes effect in 1996.

Under the new system, the current tax deductions will be replaced by eight annual straight homeowner subsidy payments of DM 5,000 or 5 % of the cost of acquisition of new homes (land and building), whichever is less. A home is still "new" if purchased by the end of the second year following the year of its completion. On purchase of "used" homes, the annual subsidy percentage and limit are 2.5 % and DM 2,500 respectively. The maximum total subsidies for new and used homes are therefore DM 40,000 and DM 20,000 respectively, spread over a period of eight years.

Home ownership subsidies based on family size (number of children) will be paid in addition to the personal subsidy described above. The children's subsidies amount from 1996 onwards to DM 1,500 per child per year during the eight year subsidy period or DM 12,000 per child overall. The children's subsidies replace the current tax refund of DM 1,000 per child per year ("Baukindergeld").

The sum of personal and children's subsidies is, however, limited to the acquisition costs. The subsidies are only granted to persons not exceeding the income limits presently in effect of DM 120,000 / DM 240,000 (single and married). The limits refer to income net of income-related deductions but before personal deductions, and thus correspond neither to gross income nor to taxable income. Unlike the previous system, however, the income limit will in the future be determined with respect to average income in the year of acquisition and the year before. Income will thus no longer be reviewed in each year of the benefit period. In new sec. 10i EStG, a standard deduction of DM 3,500 is created for all so-called "pre-occupancy costs" except pre-occupancy repair and maintenance costs (e.g. for loan discount and for notary fees in connection with the recordation of mortgages). The standard deduction is only available if the income limit is met. The maximum deduction for pre-occupancy repair and maintenance expenses in connection with home purchases is unchanged at DM 22,500. This deduction is available irrespective of income.

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