What does depreciation according to section 7 (5) of the Income Tax Act mean?
Depreciation according to § 7 para. 5 EStG refers to declining balance depreciation, which allows builders or buyers to depreciate new buildings or flats at a high rate in the first few years. Declining balance depreciation is no longer possible for properties with a building application or purchase contract from 1 January 2006. Since then, only straight-line depreciation has been permitted.
For previous purchases, the following depreciation rates apply:
Building application/purchase contract from 30 July 1981 to 28 February 1989 and from 1 January 1996
- First eight years: 5 per cent
- Next 6 years: 2.5 per cent
- Next 36 years: 1.25 per cent
Building application/purchase contract from 1 January 2004 to 31 December 2005
- First 10 years: 4 per cent
- Next 8 years: 2.5 per cent
- Next 32 years: 1.25 per cent
Building application/purchase contract from 1 March 1989 to 31 December 1995
- First 4 years: 7 per cent
- Next 6 years: 5 per cent
- Next 6 years: 2 per cent
- Next 24 years: 1.25 per cent
Current: Due to the housing shortage and the construction industry crisis, declining balance depreciation for new rental residential buildings has been reintroduced. Specifically, from 1 October 2023 to 30 September 2029, if construction begins or the purchase contract is concluded and the building is acquired by the end of the year of completion, a declining balance depreciation of six per cent of the residual value is possible in accordance with § 7 para. 5a EStG. This regulation also applies to construction projects for which a building permit has already been issued but work has not yet started. Declining balance depreciation can be claimed for all residential buildings in EU/EEA member states, without restriction to domestic buildings.
As long as declining balance depreciation is used, depreciation due to exceptional technical or economic wear and tear is not permitted. However, if such wear and tear occurs, it is possible to switch to straight-line depreciation in accordance with § 7 para. 4 no. 2a EStG, with an annual deduction of three per cent. The taxpayer has the option to switch to straight-line depreciation. After the switch, the residual value is determined based on the original acquisition and production costs minus previous depreciation. If the actual useful life after switching to straight-line depreciation is shorter than the usual useful life of 33 years, a higher depreciation rate than three per cent can be used (§ 7 para. 4 sentence 2 EStG).
