What is depreciation?
With the so-called depreciation, you can deduct the acquisition or production costs of your building, apartment, or construction measure as income-related expenses over several years. The annually deductible part is referred to as depreciation or depreciation for wear and tear (AfA).
Depreciation, like renovation costs and ancillary costs, counts as income-related expenses and thus reduces your tax burden. Depreciation is possible for rented or commercially used houses and apartments. It is important to note that only the value of the building can be depreciated - the value of the land does not depreciate for tax purposes.
A distinction is made between linear depreciation, declining balance depreciation, and special depreciation under Section 7b of the Income Tax Act (EStG), each with different conditions and timeframes.
1. Linear depreciation
For properties built after 31 December 1924, buyers can deduct two percent of the purchase costs excluding land from their taxes for 50 years. For a purchase price excluding land of 200,000 Euro, taxable income is reduced by 4,000 Euro (2 percent of 200,000 Euro). Assuming a personal tax rate of 35 percent, the tax saving is 1,400 Euro per year. If the property is bought or sold during the year, the annual depreciation is applied on a pro-rata basis.
For properties built before 1 January 2025, buyers can deduct 2.5 percent of the purchase costs excluding land from their taxes for 40 years.
Currently: For properties built (completed) after 31 December 2022, buyers can deduct 3 percent of the purchase costs excluding land from their taxes for 33 1/3 years.
2. Declining balance depreciation for residential buildings
Due to the acute housing shortage and the crisis in the construction industry, declining balance depreciation for new rental residential buildings has been reintroduced. Specifically: From 1 October 2023, there is declining balance depreciation for rented residential buildings if construction begins or the purchase contract is concluded between 1 October 2023 and 30 September 2029, and the building is acquired by the end of the year of completion. The declining balance depreciation is six percent of the respective residual value (Section 7 (5a) EStG). The declining balance AfA also applies to construction projects for which a building permit has already been issued but have not yet started. The declining balance AfA can be claimed for all residential buildings located in an EU/EEA member state. There is no restriction to residential buildings in Germany.
As long as declining balance depreciation is applied, depreciation for extraordinary technical or economic wear and tear is not permitted. If these occur, a switch to linear AfA under Section 7 (4) No. 2a EStG (3 percent annually) is possible. The taxpayer should have the option to switch to linear AfA under Section 7 (4) No. 2a EStG. The linear AfA is to be applied to the residual value after the switch. The residual value is determined from the original acquisition and production costs reduced by previous depreciation. If, after switching to linear AfA, the actual useful life is shorter than the usual useful life of 33 years, this can be used as a basis. This means that the depreciation rate is then higher than 3 percent (Section 7 (4) sentence 2 EStG).
3. Special depreciation under Section 7b EStG
To stimulate the construction of new rental apartments in the lower and middle price segment, the legislator introduced a temporary special depreciation under Section 7b EStG in 2019, which was relaunched in 2022.
3. A. Depreciation for building applications between 1 September 2018 and 31 December 2021
The 7b special depreciation amounts to 5% of the acquisition or production costs up to 2,000 Euro per square metre of living space in the year of acquisition or production and the following three years. Additionally, linear AfA of 2% per year is possible, based on the actual acquisition or production costs (Section 7 (4) EStG).
Eligible are buildings whose construction costs do not exceed 3,000 Euro per square metre of living space. The subsidised property must be rented for at least 10 years, without a rent cap. This applies to both new buildings and the expansion of apartments in existing buildings, such as attic conversions and extensions.
The cut-off date for the special depreciation is 31 December 2021. However, it can be claimed for the first time in the year of completion or acquisition. The funding period is limited to 2026 to promote the rapid creation of housing.
3. B. Depreciation for building applications between 1 January 2023 and 31 December 2026
The special depreciation under Section 7b EStG is intended to promote the construction of rental apartments. In detail:
Eligible are rental apartments for which the building application is submitted between 1 January 2023 and 31 December 2026 or a corresponding building notice is issued.
The special depreciation amounts to 5% of the acquisition or production costs up to the eligible assessment basis in the first four years. Additionally, linear AfA of 2% per year is possible, based on the actual acquisition or production costs.
Eligible are acquisition or production costs up to 2,500 Euro per square metre of living space and buildings whose construction costs do not exceed 4,800 Euro per square metre of living space. The acquisition of such an apartment must take place by the end of the year of completion.
The special depreciation is linked to efficiency requirements. The building must meet the criteria for an "Efficiency House 40" with sustainability class/efficiency building level 40 and receive the "Sustainable Building Quality Seal" (QNG). This is intended to promote ecological and socio-cultural quality.
Tip: Due to uncertain developments in construction costs, there may be changes in cost reference values in the future. This is already mentioned in the explanatory memorandum to the law.
Tip: Compliance with de minimis aid is required, but only for eligible entrepreneurs. Landlords are not subject to these requirements.
Tip: Newly built apartments in 2022 due to a building notice or building application are excluded from Section 7b EStG.
(2023): What is depreciation?
What does depreciation according to section 7 (5) of the Income Tax Act mean?
Depreciation under § 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 in accordance with § 7 para. 5a EStG is possible. 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, where three per cent is deducted annually. 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).
(2023): What does depreciation according to section 7 (5) of the Income Tax Act mean?
