What is depreciation?
Depreciation (also "deduction for wear and tear" or AfA) allows the purchase or construction costs of a building or construction work to be spread over several years as income-related expenses for tax purposes. This reduces your tax burden, as the annually deductible portion of the costs is subtracted from your taxable income. Depreciation applies to rented or commercially used properties, but not to the value of the land, as this does not depreciate for tax purposes.
Types of Depreciation
1. Straight-Line Depreciation (AfA)
With straight-line depreciation, a fixed percentage of the purchase or construction costs is deducted annually:
- For buildings constructed after 31 December 1924, the depreciation is 2% per year over a period of 50 years.
- For buildings constructed before 1 January 1925, the depreciation is 2.5% per year over 40 years.
- For buildings completed after 31 December 2022, depreciation is 3% over 33 1/3 years.
Example:
- Purchase price excluding land: 200.000 Euro
- Annually deductible amount at 2% AfA: 4.000 Euro
- Tax saving at a tax rate of 35%: 1.400 Euro per year.
2. Declining Balance Depreciation (AfA)
Since 1 October 2023, declining balance depreciation applies to newly constructed rental residential buildings. Conditions: Construction start or purchase contract between 1.10.2023 and 30.9.2029 and acquisition in the year of completion. The regulation also applies to buildings in the EU/EEA.
The depreciation is 5% of the investment costs in the first year. In the following years, five percent of the remaining value. A switch to straight-line AfA (3% annually) is possible.
3. Special Depreciation under § 7b EStG
Special depreciation was introduced to promote the construction of rental housing:
- For building applications between 1 January 2023 and 31 December 2026.
- Special depreciation: 5% of the purchase or construction costs in the first four years, in addition to a straight-line AfA of 2%.
- Upper limit: 4.000 Euro per square metre of living space, construction cost limit: 5.200 Euro per square metre.
The special depreciation is linked to certain efficiency requirements, e.g. the "Sustainable Building Quality Seal".
Special Regulations for Depreciation
- Pro rata depreciation: If a property is purchased or sold during the year, depreciation is only applied for the relevant period.
- Change of depreciation method: With declining balance depreciation, a switch to straight-line AfA can be made at any time. Depreciation is then based on the remaining value.
Tip on Special Depreciation
Compliance with de minimis aid is required for businesses. These regulations do not apply to private landlords.
What is depreciation?
What does depreciation according to section 7 (4) of the Income Tax Act mean?
Depreciation according to § 7 para. 4 EStG refers to straight-line depreciation that can be used for any building that is rented out or used for business purposes. For houses built by 31 December 1924, the buyer can deduct 2.5 percent for 40 years.
For properties built after 31 December 1924, buyers can deduct two percent of the purchase costs excluding land as business expenses for 50 years. The depreciation period starts anew with each buyer, even if the previous buyer has already depreciated the building. Depreciation begins in the year of purchase or completion – for this year, however, only on a pro rata basis.
Current: For properties built (completed) after 31 December 2022, buyers can deduct three percent of the purchase costs excluding land from tax for 33 1/3 years.
What does depreciation according to section 7 (4) of the Income Tax Act mean?
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).
What does depreciation according to section 7 (5) of the Income Tax Act mean?
