Depreciation (AfA)

Depreciation (AfA) - Depreciation is the tax-recognized reduction in the value of a property over its useful life. It allows owners of rental properties to claim the acquisition or construction costs of the building as business expenses against rental income, thereby reducing their tax burden.

Straight-line Depreciation under Section 7(4) of the Income Tax Act (EStG)

Regular building depreciation is calculated on a straight-line basis-that is, in equal annual amounts-over the legally prescribed useful life. The depreciation rates depend on the year of construction and the type of building:

For residential buildings with a building permit or purchase agreement on or after January 1, 2023, a depreciation rate of 3 percent per year applies, corresponding to a useful life of approximately 33 years. This increase was introduced by the Annual Tax Act of 2022 to make residential construction more tax-attractive.

For residential buildings with a building permit or purchase agreement between 1925 and the end of 2022, the depreciation rate is 2 percent annually with a useful life of 50 years. For buildings completed before 1925, a depreciation rate of 2.5 percent applies with a useful life of 40 years.

Calculation example: For a condominium purchased in 2018 in Nuremberg-Maxfeld at a purchase price of 400,000 euros, 60 percent is allocated to the building (= 240,000 euros) and 40 percent to the land (= 160,000 euros) according to the BMF guidelines. The annual depreciation amounts to 2% × 240,000 euros = 4,800 euros, which reduces taxable rental income as income-related expenses.

The depreciation base includes the acquisition costs of the building plus incidental acquisition costs (notary, land registry, real estate agent’s commission for rented properties)-but excluding the land portion, as land is considered non-depreciable. The purchase price is generally allocated between the building and land components based on the ratio of market values or according to the method specified by the Federal Ministry of Finance.

Special Depreciation and Increased Depreciation

In addition to regular depreciation, there are special depreciation options designed to specifically promote certain investments.

The special depreciation for new rental housing under Section 7b of the Income Tax Act (EStG) allows for an additional annual depreciation of 5 percent during the first four years-in addition to regular depreciation. The prerequisite is that construction costs do not exceed certain upper limits and that the apartment is rented out for at least ten years. This regulation has been extended and adjusted several times.

For historic buildings, particularly attractive depreciation rates apply under Sections 7h and 7i of the German Income Tax Act (EStG). Renovation costs for historic buildings can be depreciated over twelve years at a rate of 9 percent annually (first eight years) and 7 percent (further four years) if the property is rented out-amounting to 100 percent of the renovation costs. Owner-occupiers can deduct the costs over ten years at a rate of 9 percent per year.

Declining-Balance Depreciation Starting in October 2023

For residential buildings whose construction began after September 30, 2023, the Growth Opportunities Act introduced a declining-balance depreciation rate of 5 percent on the respective remaining book value (Section 7(5a) of the German Income Tax Act). Unlike straight-line depreciation, the annual depreciation amount decreases continuously as the book value declines-but offers significantly higher deductions in the early years and thus an earlier tax benefit. A one-time switch from declining-balance to straight-line depreciation is permitted and recommended as soon as the straight-line amount exceeds the declining-balance amount.

Practical Tip for Property Owners in Nuremberg and Franconia

With its rich stock of historic buildings-such as those in the Old Town, St. Johannis, and Gostenhof-the Nuremberg metropolitan region offers particularly attractive opportunities for historic preservation depreciation. Renovation costs can be claimed for tax purposes almost in full, which significantly reduces the effective investment burden. Anyone investing in historic properties in Nuremberg should obtain a tax certificate from the relevant historic preservation authority in advance, confirming the eligibility of the measures for tax benefits.

We recommend that investors incorporate the depreciation strategy into their investment decision early on and properly document the allocation of the purchase price between the building and land components in the purchase agreement. If the allocation in favor of the building portion is too low, the tax office may correct it during the assessment process, resulting in a lower annual depreciation allowance.

Frequently Asked Questions

Can I also use the depreciation allowance for owner-occupied residential property?

No, the standard building depreciation is only available to owners who rent out their property. For owner-occupied properties, there is no depreciation option for the building. Exceptions apply only to the historic preservation depreciation under Section 7i of the Income Tax Act (90 percent over ten years for owner-occupiers) and for a home office, provided it is used exclusively for business purposes and the tax requirements are met.

How is the land portion separated from the building portion?

The allocation is generally based on the ratio of the market values of the land on the one hand and the building on the other. The Federal Ministry of Finance provides a tool (Excel calculator) that determines the building portion using a standardized method. The land portion is calculated by multiplying the standard land value by the land area. In sought-after locations such as Nuremberg’s Old Town or Erlenstegen, the land portion can account for 40 to 50 percent or more of the purchase price-a significant factor in determining the depreciation base.

Can I claim depreciation retroactively?

Depreciation begins at the time of acquisition or completion and is calculated annually from that point on. If you forgot to claim depreciation in previous tax returns, you cannot make up for the missed depreciation in a later year-the lost depreciation is permanently forfeited. However, tax assessment notices that are not yet final can be corrected by filing an appeal within the one-month deadline. We therefore recommend reviewing tax assessment notices promptly upon receipt.

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