Real estate agents play an important role in the property market. Many rentals, purchases and sales of real estate are handled through them. In return, they receive a commission. In the residential property market, this commission, also known as brokerage commission, has been clearly regulated by law for several years. For a long time, things were different when buying and selling real estate. Until the end of 2020, agents and clients were free to negotiate who would bear the costs and the fees. As a rule, both parties shared the costs or the buyer of a house or apartment assumed them in full. This has changed since an amendment to the law. Who has paid the brokerage commission in real estate sales since then?
Real Estate Brokerage Commission When Buying Property: The Legal Situation
With the unwieldy title “Act on the Distribution of Brokerage Costs in the Brokering of Purchase Agreements for Apartments and Single-Family Houses”, the German government adopted new key provisions in 2020, which entered into force in December 2020. These changes have a significant impact on the question of who bears the brokerage costs. At the same time, the law amended relevant sections of the German Civil Code (BGB) dealing with brokerage costs.
Important: The changes only apply to private real estate sales!
At several points, the wording of the law intervenes in long-standing practice. The aim was to reduce the purchase costs for real estate and to clarify the contractual arrangements with agents. The law forms the basis for all brokerage agreements concluded since its introduction.
What changed as a result of the law?
The most significant change is the division of brokerage costs for private real estate sales. Previously, it was common for the seller to pass the brokerage costs on to the buyer of a property or for both parties to share the payment. The law extends the ordering principle from the residential rental market to sales. This means:
- The agent must address their invoice to their contractual partner.
- The costs may only be passed on by the invoice recipient if the costs passed on to a third party do not exceed 50 percent of the brokerage fees and the agent’s client has demonstrated payment of the full commission.
- If the agent promises one of the purchasing parties to act without a commission, must not subsequently charge this to the other purchasing partner.
- The broker must split the commission between buyer and seller if they have concluded a contract with both.
In other words: As a general rule, the party involved in the change of ownership that commissioned the intermediary pays the brokerage commission. Since the initiative in a property sale generally comes from the seller, unlike before, this is usually the seller. The law is intended to curb the rapid development of property prices somewhat. However, in practice it can be seen that many sellers add the brokerage costs to the desired price.
Brokerage agreements: Text form is a minimum requirement
However, there are further changes. In the past, verbal agreements with brokers were quite common. Since the end of 2020, brokerage agreements must be concluded in text form. This means that there must be a written agreement or clearly identifiable engagement, at least by email or fax. A handshake or telephone consent is no longer sufficient.
Remuneration only for services rendered
As before, the following continues to apply: The broker may demand a commission for their brokerage services. However, they must then prove that they played a significant role in the sale or purchase of the property. As a rule, they will therefore accompany the sales process from the advertisement through to the conclusion of the contract. If the intermediary cannot prove significant activity or no transaction is concluded, they may not issue an invoice. In private property sales, brokers work on a success-based commission basis.
A basic distinction is made between two different commission designations:
- Internal commission: The broker concludes a contract with the seller and charges them their commission.
- External commission: The broker advertises the property and states their costs for the buyer. This procedure has no longer been possible for the sale of private residential properties since the amendment to the law.
Practical examples of brokerage commissions
What was previously freely negotiable is now clearly regulated, at least on paper. In particular, the broker as a real estate intermediary is subject to the essential restrictions. An example illustrates who has to pay the broker’s fee and when:
- A property owner engages an intermediary and concludes a contract with them. After successfully selling their house, they must pay the broker pay the commission.
- This property owner may demand up to half of the commission from the buyer of the house, which is recorded in the purchase agreement. However, he will only receive this amount after proving that he has paid the entire commission.
- If the seller had only instructed the broker verbally, the agent would receive nothing.
- If the commissioned broker had already been working for the later buyer, he would have to invoice his commission in equal parts to the buyer and the seller as his clients.
- If the buyer were a commercially operating housing company or if the property were a commercial property or a mixed-use property, the broker, client and potential buyer could freely negotiate the amount and payment of the brokerage fees.
- If the seller had commissioned a broker but then sold the property without the broker’s involvement to, for example, an acquaintance, the broker may not issue an invoice for a commission. An exception may apply in the case of an exclusive agreement.
The commission: How much does a broker cost when selling private property?
Even after the change in the law, there are no regulations stipulating what commission a broker may charge. The amount of the commission is therefore not fixed and is freely negotiable. However, there are guidelines to which most brokers adhere. These differ depending on the federal state and, in some cases, between different regions.
In the federal states of Baden-Württemberg, Bavaria, Berlin, Brandenburg, Bremen, North Rhine-Westphalia, Rhineland-Palatinate, Saarland, Saxony, Saxony-Anhalt, Schleswig-Holstein and Thuringia, a broker’s commission (including VAT) of 7.14 percent of the property’s sale price applies. As a rule, the amount was split before the change in the law. Only in Berlin and Brandenburg was it customary for the buyer to pay the entire commission.
Exceptions to the typical rate of 7.14 percent are Hamburg (6.25 percent), as well as Hesse and Mecklenburg-Western Pomerania (5.95 percent each). A special rule applies in Lower Saxony. Here, the commission rate is 7.14 percent in most regions. In some areas, however, it is only 4.76 to 5.95 percent and was not always divided equally between the parties in the past.
Tip: Anyone who commissions a broker should first ask about the exact amount of the commission. In addition to the standard commission rates for the federal states, deviations may exist regionally or locally, as well as the costs being negotiated individually.
Is the commission tax-deductible?
When buying or selling a house or apartment, the broker’s fee can quickly reach a five-figure sum. For a small house priced at 200,000 euros, a commission of 7.14 percent results in a commission amount of 14,280 euros in most federal states.
Under certain conditions, this amount can reduce taxable income. Small details are important here.
- The seller can claim the costs for tax purposes as income-related expenses if they generate a tax-relevant capital gain on the sale. Caution: This is generally not the case with privately sold properties if they were occupied by the owner for more than one year immediately prior to the sale or were owned for more than ten years.
- The buyer can claim the commission as incidental acquisition costs for tax purposes. However, this requires them to rent out the property. In addition, the amount is not relevant for the respective tax year. Instead, it is added to the purchase price and included in the annual depreciation. In the long term, this reduces the tax burden.
There are also mixed forms of use and special cases. These, as well as the individual situation, can influence the tax treatment. In principle, however, the costs can be claimed from the tax office. The costs of a real estate agent are not tax-deductible in purely private transactions. These occur when a property is sold privately and without a taxable profit to a buyer who does not rent out the property.