Tax Incentives for Housing through Charitable Purposes
In response to high rents and housing shortages, the German government is reintroducing non-profit housing. In early June 2024, the federal cabinet decided, as part of the 2024 Annual Tax Act, to include the “promotion of non-profit housing purposes” as a new charitable purpose in the Fiscal Code (Abgabenordnung – AO). This allows social enterprises, associations, and foundations to offer affordable housing and benefit from tax relief. The prerequisite is that the offered rent is below the market rate.
The concept of non-profit housing was last seen in Germany in 1990. Now, this tool is being brought back to create affordable housing and, in return, benefit from tax relief, according to the law firm MTR Legal Rechtsanwälte, which also advises on tax law.
Incorporation of Non-Profit Housing into the Fiscal Code
The new non-profit housing (NWG) is not intended to compete with the real estate industry but rather to expand it with another pillar alongside social housing, explains the Federal Ministry of Housing, Urban Development, and Building (BMWSB) on its website. The NWG is aimed at socially oriented companies with housing stocks. By incorporating non-profit housing into the Fiscal Code, housing construction, modernization, and the rental of apartments at affordable prices are intended to become financially attractive. This is made possible by classifying the provision of affordable housing as a charitable activity, which can thus be tax-favored.
The aim is to promote the rental to people whose income is no higher than five to six times the social assistance level. According to the ministry, the NWG is designed to apply to up to 60% of households in Germany. The prerequisite is that the offered rent is permanently below the market rate. The tenants’ income is only checked once at the beginning of the tenancy. Thus, they do not have to fear that with increasing income, the charitable status will be revoked, and they will have to pay a higher rent. The possibilities for tax-favored renting are thereby significantly expanded. Additionally, reserves can be formed for long-term investment projects such as the renovation of properties.
Significant Tax Relief
According to estimates by the BMWSB, tax relief per apartment can amount to between one thousand and two thousand euros per year. A real estate company with 300 apartments in its portfolio could save around half a million euros in taxes annually and use the money for rent reductions or investments in the properties. In the future, targeted measures for companies that act charitably and create affordable housing may also be considered.
Associations, foundations, or “social” companies can benefit from the reintroduction of non-profit housing and utilize tax advantages to, for example, carry out necessary renovations on existing properties. On the other hand, people and families with lower incomes could find affordable housing through this non-profit initiative. The NWG allows non-profit housing companies to offer permanent social commitments and thus permanently reduced rents. This is also a distinction from social housing, where this commitment is time-limited. Companies that commit to being non-profit housing companies (gWU) can thereby save a tax burden of 25 to 45 cents per square meter of living space per month.
Tax Advantages for Affordable Housing
The concept of non-profit housing is not new and existed in Germany until 1990. It was then abolished as part of tax reform. The concept of charitable purposes is also not new. Charitable activities have been tax-favored in the Fiscal Code since 1977. Charitable purposes included, among others, the promotion of welfare, youth and elderly care, art and culture, or monument and nature conservation. Associations, foundations, and other entities engaged in these areas can benefit from tax advantages. This now also applies to companies, foundations, associations, and other organizations that are committed to and enable affordable housing.
For housing companies, foundations, and associations, the NWG could open up entirely new possibilities.
MTR Legal Rechtsanwälte advises on real estate law and tax law.
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