Depreciation (allowance for)

Depreciation (Deduction for) - The depreciation deduction (AfA) is the tax treatment of the loss in value of buildings and equipment over their useful lives. In the real estate sector, it allows landlords to deduct the acquisition or construction costs of a building as business expenses from rental income over a period specified by law.

Depreciation Rates for Real Estate

The standard straight-line depreciation rate is based on the year of construction:

Year of Construction / Building Permit	Depreciation Rate	Useful Life
From 2023	3.0%	~33 years
1925 to 2022	2.0%	50 years
Before 1925	2.5%	40 years

The depreciation base includes the building portion of the acquisition costs plus incidental expenses (notary, land registry, pro-rata real estate agent commission for rented properties)-the land portion is not depreciable, as land is not subject to wear and tear.

Calculation example: Purchase price of a condominium in Nuremberg: 350,000 euros. Of this, 30 percent is attributable to the land portion (= 105,000 euros) and 70 percent to the building (= 245,000 euros). With a depreciation rate of 2 percent, this results in an annual depreciation of 4,900 euros, which is deductible as income-related expenses for income tax purposes.

In addition, there are increased depreciation allowances: the special depreciation under Section 7b of the Income Tax Act (EStG) for new rental housing (an additional 5% in the first four years, in addition to the regular depreciation) and the historic preservation depreciation under Sections 7h/7i of the Income Tax Act (EStG) (up to 100% of renovation costs over 12 years for rental properties: 9% in the first eight years, 7% in the following four years). Owners who live in listed buildings can deduct renovation costs at a rate of 9% per year over ten years.

Declining-Balance Depreciation for New Buildings

The Growth Opportunities Act introduced a 5% declining-balance depreciation on the respective residual book value for residential buildings whose construction began after September 30, 2023 (§ 7 (5a) EStG). In contrast to straight-line depreciation, which deducts a constant amount, the annual depreciation amount under the declining-balance method decreases continuously-but offers a greater tax benefit in the early years. A one-time switch from declining-balance to straight-line depreciation is permitted.

Implications for Real Estate Investment

Depreciation is one of the most important tax levers for real estate investors. It reduces taxable income from renting and leasing without an actual cash outflow-depreciation is purely a matter of accounting. Especially for historic properties or new buildings with special depreciation, the tax relief in the first few years can be significant and noticeably improve the effective return on investment.

Comparison of Depreciation Types

Depreciation Type	Rate	Application	Legal Basis
Straight-line Depreciation (New Construction ≥ 2023)	3.0%	New residential buildings from 2023	Section 7(4) EStG
Straight-line depreciation (1925-2022)	2.0%	All buildings from 1925 onward	Section 7(4) EStG
Straight-line depreciation (pre-1925)	2.5%	Existing buildings from before 1925	Section 7(4) EStG
Declining balance depreciation	5.0% (remaining book value)	New construction starting Oct. 2023	§ 7(5a) EStG
Historic preservation depreciation (rental)	9% × 8 years + 7% × 4 years	Listed buildings	§ 7h/7i EStG
Historic Preservation Depreciation (owner-occupied)	9% × 10 years	Listed buildings	Section 10f EStG
Special Depreciation for New Construction	+5% × 4 years (additional)	New rental housing construction	Section 7b EStG

Practical Tip for Property Owners in Nuremberg

We recommend properly documenting the breakdown of the purchase price into building and land components in the purchase agreement and, if necessary, supporting this with an appraisal. In sought-after Nuremberg locations such as the Old Town, St. Johannis, or Maxfeld, the land component can account for 30 to 50 percent, which reduces the depreciation base accordingly. The Federal Ministry of Finance provides an online tool that allows for the standard calculation of the building portion-the tax office also uses this as a guideline.

The Nuremberg metropolitan region also offers numerous historic properties in the Old Town, Gostenhof, and Wöhrd, where the historic building depreciation (Denkmal-AfA) provides particularly attractive tax benefits. Anyone investing in this segment should obtain a tax certificate from the relevant authority in advance, confirming the eligibility of the renovation measures. In Bavaria, this certificate is issued by the State Office for the Preservation of Historical Monuments-cooperation with the historic preservation office should be sought well in advance of the start of renovation work.

Frequently Asked Questions

Can I claim depreciation for owner-occupied properties?

No, the standard building depreciation is only available for rented properties. There is no depreciation option for owner-occupied residential properties. Exceptions apply to the historic preservation depreciation under Section 7i of the Income Tax Act (90% over 10 years for owner-occupiers) and for a tax-recognized home office, provided it is used exclusively for professional purposes.

What is the difference between straight-line and declining-balance depreciation?

Straight-line depreciation spreads the costs evenly over the entire useful life-the depreciation amount remains the same each year. Declining-balance depreciation, which applies to new buildings starting in October 2023, begins at 5 percent of the respective remaining book value. Since the book value decreases annually, the absolute depreciation amount also decreases-however, in the early years it is significantly higher than with the straight-line method, leading to earlier tax savings.

Can I claim depreciation retroactively if I forgot to do so?

No, depreciation must be claimed annually and cannot be carried forward to subsequent years. Forgotten depreciation amounts are irrevocably forfeited. However, tax assessment notices that are not yet final can be corrected through an appeal. Anyone who realizes they did not claim depreciation in a past year should therefore immediately check whether the assessment is still contestable-as a rule, the appeal period is one month after the assessment is issued.

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