Special requests can increase property transfer tax: What property buyers need to know

When buying a house or condominium, buyers should not only consider the purchase price. Additional ancillary costs, which can amount to almost ten per cent of the purchase price, should also be factored in. These include estate agent and notary fees as well as land transfer tax, which varies between 3.5 and 6.5 per cent depending on the federal state. These costs can have a considerable impact on the budget and should therefore be taken into account in financial planning.

Two recent rulings by the Federal Fiscal Court (BFH) from 30 October 2024 (Ref. II R 15/22 and Ref. II R 18/22) clarify which value is to be used for real estate transfer tax purposes. The cases concerned plots of land with planned new buildings. In the cases in question, the plaintiffs purchased undeveloped plots of land on which a condominium or semi-detached house was to be built. In the purchase agreement, the sellers of the plots undertook to build the properties. After construction work began, the buyers made special requests, such as higher-quality interior doors, roller shutters and floor coverings, which resulted in additional costs.

The central question was whether these subsequent special requests increase the real estate transfer tax. In principle, this tax is based on the value of the consideration, usually the purchase price. However, in the case of an undeveloped plot of land that is developed, the construction costs are also part of the assessment basis if the buyer no longer has the freedom to decide on the details of the development when the contract is concluded. The property buyer can then only conclude the contract together with the building contract and has no freedom of choice.

In such a case, the purchase and construction contracts are combined into one legal transaction for the purposes of real estate transfer tax. If the building contract and the property purchase contract are concluded at the same time, the tax authorities generally assume that the acquisition is a single object, meaning that the real estate transfer tax is calculated according to the circumstances at the time of completion of the building. Consequently, the construction costs increase the assessment basis for real estate transfer tax. This applies regardless of whether the seller of the property and the building contractor are identical or are different persons.

The Federal Fiscal Court ruled that expenses for special requests that are agreed with the property seller after the contract has been concluded also increase the assessment basis for real estate transfer tax, provided they are still originally related to the purchase. These additional services are considered part of the consideration and must be reported to the tax office within two weeks of becoming known.

However, the situation is different if the subsequent building alterations are agreed directly with a tradesman without involving the seller of the property, as there is then no longer any connection with the purchase of the property and therefore no additional property transfer tax is payable.

Buyers should therefore be aware that any changes to the building project can have real estate transfer tax implications and thus trigger additional tax charges. And that it must be reported.

The author is a tax consultant at KPMG.