New special depreciation for rental properties

The "Act on the Tax Promotion of New Rental Housing" of 4 August 2019 introduced a temporary special depreciation under Section 7b of the Income Tax Act to promote investments in new rental housing. This applied to investments for which a building application was submitted or a building notice was made between 1 September 2018 and 31 December 2021.

• The 7b special depreciation amounted to 5% of the acquisition or production costs in each of the first four years, up to 2,000 Euro per square metre of living space.
• An additional straight-line depreciation of 2% per year was deductible, but based on the actual acquisition or production costs (Section 7 (4) of the Income Tax Act).
• Only buildings with construction costs of no more than 3,000 Euro per square metre of living space were eligible.
• The subsidised property had to be rented out for at least 10 years, without any rent cap.

From 1 January 2023, the expired 7b special depreciation will be renewed. It now applies to rental housing for which a building application is submitted or a building notice is made between 1 January 2023 and 31 December 2026, provided certain (energy) efficiency requirements are met.

• The 7b special depreciation amounts to 5% of the acquisition or production costs in each of the first four years up to the eligible assessment basis.
• An additional straight-line depreciation of 2% per year is also possible, but based on the actual acquisition or production costs.
• Eligible acquisition or production costs are up to 4,000 Euro per square metre of living space.
• Construction costs must not exceed 5,200 Euro per square metre of living space.

New special depreciation for rental properties

What can I deduct as income-related expenses?

All expenses incurred in connection with the rented property can be deducted as income-related expenses. These include in particular the following costs:

• Administrative costs
• Costs for estate agents, service charges, advertisements or a rental service
• Interest on a loan
• Depreciation
• Property tax
• Bank charges, overdraft interest etc.
• Insurance (liability, fire, water etc.)
• Electricity costs for house lighting
• Heating and hot water
• Costs for sewage, waste disposal, chimney sweep, street cleaning
• Caretaker costs (also property management and cleaning)
• Trips to the property, estate agent or owners' meeting
• Cosmetic repairs

Additional costs that you settle with your tenants can only be declared as income-related expenses in your tax return if you also enter them as income from renting and leasing.

What can I deduct as income-related expenses?

What are income-related expenses in connection with the rental and leasing of a property?

You can deduct income-related expenses from your income from renting and leasing. Income-related expenses are costs incurred for the acquisition, securing, and maintenance of the property.

These expenses are deducted from the rental income. A positive result, i.e., a profit, increases your tax burden. A negative result leads to a tax saving.

A tax loss from renting and leasing due to high income-related expenses can be offset against other positive income. The decisive factor for entering the income-related expenses in the tax return is the date of payment. When the expenses were incurred or when you received the invoice is generally irrelevant.

You can also claim income-related expenses if the property is not yet rented. However, there must be an intention to rent. If you do this, the tax office will initially recognise the costs but will issue the tax assessment on a provisional basis. If you do not rent out the property, the tax office may revoke the deduction of income-related expenses.

What are income-related expenses in connection with the rental and leasing of a property?

How should the estate agent's commission for landlords be assessed?

Since 1 June 2015, the "ordering party principle" has applied to residential tenancy agreements in Germany. This means that the broker's commission is paid by the person who hired the broker. Passing on the commission obligation to a third party is no longer permitted when renting flats. A prospective tenant only has to pay the broker's fee if they conclude a brokerage agreement with the broker in text form and the broker receives the flat from the landlord exclusively to fulfil this order. Any deviation from this regulation is invalid (§ 2 para. 1a Act on the Regulation of Housing Brokerage).

However, it should be noted that this regulation does not yet apply to the purchase of property. When buying property, the distribution and amount of the broker's commission in Germany are regulated differently depending on the federal state and individual agreement between broker and seller. In some countries and regions, the buyer bears the entire broker's commission, while in other parts of the country the commission is usually shared between buyer and seller.

Currently, the "Act on the Distribution of Broker Costs in the Brokerage of Purchase Contracts for Flats and Single-Family Houses" was enacted on 12 June 2020. This law re-regulates the broker's commission and stipulates that the entire broker's costs may no longer be passed on to the buyer. Buyers of residential property may no longer be required to pay more than half of the broker's commission. If only one party has commissioned the broker, that party must pay the broker's fee. The seller can agree to pass on the broker's costs to the buyer, but the costs passed on may not exceed 50 per cent of the total commission payable. In cases where the broker is commissioned by both parties, he can only agree on a commission of the same amount with both parties.

The new regulation comes into force six months after the publication of the law. It applies to the sale of single-family houses and owner-occupied flats, but not to commercial properties, multi-family houses and building plots. It applies if the buyer is acting as a consumer, but not if the buyer is acting in the course of a business activity.

It is expected that commission rates will fall as a result of these changes, as sellers will have a stronger incentive to negotiate the amount of the commission if they themselves are obliged to pay half. This could lead to a reduction in broker costs for buyers.

How should the estate agent's commission for landlords be assessed?

How are the costs of a fitted kitchen treated?

A fitted kitchen is not considered a single asset but consists of various components that are independent assets. A distinction is made between the sink and cooker on the one hand and the other kitchen elements on the other.

• Sink and cooker are considered non-independent building components required for the building's use as a residence. Therefore, these costs are part of the building's construction costs and are depreciated along with it. If the sink and cooker are replaced, the expenses are maintenance costs and can be fully deducted as advertising costs from rental income.

• The other parts of the fitted kitchen are independent assets. Their purchase costs can be deducted as advertising costs from rental income. If the purchase costs exceed 410 Euro (excluding VAT), they must be depreciated over the expected useful life. If an existing fitted kitchen is replaced with a new one, the purchase costs are not maintenance expenses and therefore cannot be fully deducted. Instead, the new fitted kitchen must be depreciated normally.

Currently, the Federal Fiscal Court has abandoned its previous view and established new rules for the tax treatment of fitted kitchens in rented flats: sinks and cookers are no longer considered non-independent building parts but are now 'normal' components of the fitted kitchen. The fitted kitchen is considered a single asset and must be depreciated over a 10-year period. This applies both to initial purchases and renewals (BFH ruling of 3.8.2016, IX R 14/15, published on 7.12.2016). The change in case law means a significant disadvantage for landlords: they can no longer immediately deduct individual components of the fitted kitchen, such as electrical appliances valued at less than 800.01 Euro (excluding VAT), as advertising costs. Instead, the entire fitted kitchen must be depreciated over 10 years, so only 10 per cent per year can be considered as advertising costs.

It still applies that a fitted kitchen can be considered an essential part of the building in exceptional cases. For this, the fitted kitchen must be permanently attached to the building and cannot be removed without damaging either part. This is assumed "if the fitted kitchen is integrated into the designated space and combined with the surrounding building walls (side walls and back wall)." In this case, the purchase costs are added to the building construction costs and depreciated at 2 per cent per year; the costs for a renewal are considered maintenance expenses and can be fully deducted as advertising costs immediately (BFH ruling of 1.12.1970, VI R 358/69).

How are the costs of a fitted kitchen treated?

What is an energy performance certificate and what costs are involved?

The energy performance certificate is a document that assesses the energy requirements of a building. There are 2 types of energy performance certificates: the requirement-based certificate and the consumption-based certificate. The requirement-based certificate considers the building's energy needs, while the consumption-based certificate analyses the actual energy consumption of recent years. Energy performance certificates are valid for ten years from the date of issue.

As a landlord of a residential building in Germany, you are legally obliged to provide an energy performance certificate for your property. The certificate provides information about the building's energy requirements and serves as a guide for tenants and buyers. However, there are costs associated with obtaining the energy performance certificate, which can affect landlords.

The costs for obtaining an energy performance certificate depend on various factors, such as the size of the building, the type of certificate, and the effort required by the energy consultant. Generally, the expenses range from 150 to 600 Euro.

Deduct energy performance certificate as income-related expenses for landlords

As a landlord, you can declare the costs for obtaining an energy performance certificate as income-related expenses in your tax return. This applies regardless of whether you obtain the certificate due to a legal obligation or voluntarily. The costs can be claimed as income-related expenses under rental income.

The costs for the energy performance certificate are immediately deductible income-related expenses. It is advisable to keep the invoice for obtaining the certificate to present it in the event of a tax office review.

What is an energy performance certificate and what costs are involved?

What costs can landlords deduct for tax purposes during a vacancy?

Anyone renting out property in Germany must not only manage the rental, tenant selection, and support but also be prepared for vacancies. If a flat or house is vacant for a certain period, it can lead to financial losses. But what options are there to deduct expenses for temporary vacancies for tax purposes?

What are expenses for temporary vacancies?

Expenses for temporary vacancies include all costs incurred in connection with renting out property but cannot be covered by rental income due to vacancies. These include costs for maintenance and repairs, advertising, energy costs, property tax, and waste disposal fees. However, the vacancy must actually be temporary, meaning there must be a realistic chance that the flat or house will be rented out again.

Tax deductibility of expenses for temporary vacancies

Expenses for temporary vacancies can be deducted for tax purposes, but certain conditions must be met. Firstly, the costs may only arise if the property is rented out and no income is generated. Secondly, the costs must be necessary and reasonable, i.e., no luxury renovations or unnecessary maintenance work should be carried out.

The deductible expenses are claimed as income-related expenses under income from renting and leasing. They must be stated in the tax return for the respective year. When calculating income tax, they are then deducted from the rental income.

Overall, expenses for temporary vacancies can be deducted for tax purposes if they are necessary, reasonable, and actually incurred. However, landlords should ensure that the vacancy is indeed temporary and that there are realistic prospects of renting it out. If landlords have any uncertainties or questions about tax deductibility, they should consult a tax advisor.

What costs can landlords deduct for tax purposes during a vacancy?