Declining-balance depreciation

Declining-Balance Depreciation - Declining-balance depreciation is a tax depreciation method in which higher depreciation amounts are applied in the first few years following acquisition or construction than in subsequent years. For residential buildings completed between October 1, 2023, and September 30, 2029, the legislature has introduced a declining balance depreciation rate of 5% of the respective remaining book value (Section 7(5a) of the Income Tax Act). This provision is intended to provide tax incentives for new residential construction.

Comparison: Declining-Balance vs. Straight-Line Depreciation

Feature	Declining-Balance Depreciation	Straight-Line Depreciation
Rate	5% of the remaining book value	3% of the acquisition cost (new construction from 2023)
Annual Amount	Decreases each year	Remains the same
Tax Benefit	Higher in the early years	Evenly distributed
Application	New construction only (completion 10/2023-09/2029)	All residential buildings
Change	One-time switch to straight-line depreciation possible	No switch to declining-balance depreciation

Calculation example (building value €300,000):

• Year 1 declining balance: 5% × 300,000 = €15,000 | straight-line: 3% × 300,000 = €9,000
• Year 2 declining balance: 5% × 285,000 = €14,250 | straight-line: €9,000
• Year 5 declining balance: 5% × 243,101 = €12,155 | straight-line: €9,000

Declining-balance depreciation results in significantly higher tax savings in the early years, but the benefit decreases year by year.

Right to Switch to Straight-Line Depreciation

The law allows for a one-time switch from declining-balance to straight-line depreciation. The optimal time to switch is typically after 10-15 years, when the annual declining-balance depreciation amount falls below the straight-line amount. From the time of the switch, the residual book value is depreciated on a straight-line basis over the remaining useful life. Calculating the optimal time to switch is a classic tax optimization task that a tax advisor should determine individually for each investor.

Implications for the Investment Decision

Declining-balance depreciation significantly improves after-tax cash flow in the first few years of an investment. For an investor with a personal tax rate of 42% (top tax rate), declining-balance depreciation yields tax savings of 6,300 euros in the first year instead of 3,780 euros (straight-line)-an improvement in net cash flow of 2,520 euros in the first year alone. This front-loading of the tax benefit increases the investment’s internal rate of return (IRR), even though the total amount of depreciation remains the same. For capital-intensive new construction projects in Nuremberg, this can strengthen the case for making an investment.

Practical Tip for Property Owners in Nuremberg and Franconia

We recommend that investors in the Nuremberg metropolitan region who purchase a new-construction apartment as an investment take advantage of the declining balance depreciation method-it yields significant tax savings, particularly in the early years, which improves the investment’s cash flow. Have your tax advisor calculate the optimal time to switch to straight-line depreciation-typically around years 12-15. Please note: The declining balance depreciation applies only to the building portion of the acquisition costs-the land portion is not depreciable. A correct allocation of the purchase price (typically 20-30% land portion in Nuremberg, depending on the location) is therefore particularly important and should be coordinated with your tax advisor.

Frequently Asked Questions

Does the declining balance depreciation also apply to existing properties?

No, the declining balance depreciation under Section 7(5a) of the German Income Tax Act (EStG) applies exclusively to new buildings completed between October 1, 2023, and September 30, 2029. For existing properties, the straight-line depreciation (2% for buildings constructed before 1925, 2.5% for buildings constructed between 1925 and 2022, 3% for new buildings starting in 2023 without the option for declining balance) continues to apply. The construction year limits and depreciation rates should be reviewed regularly with a tax advisor, as legal changes are possible.

Can I also apply the declining balance depreciation for owner-occupied properties?

No, depreciation (whether declining balance or straight-line) can only be claimed as income-related expenses against rental income for rental properties. For owner-occupied properties, there is no tax-deductible depreciation on the building. An important exception applies to historic buildings: In this case, the increased historic preservation depreciation is also possible for owner-occupied properties (Section 10f of the German Income Tax Act - 9% of renovation costs over ten years as special expenses).

Is declining-balance depreciation always more advantageous than straight-line depreciation?

Generally yes, if you, as an investor, want to maximize tax savings in the early years and have a high personal tax rate. Declining-balance depreciation brings the tax benefit forward in time-the total amount of depreciation is the same, but the present value of the accelerated tax benefit is positive. With a long planned holding period and a high tax rate, the declining balance method is clearly advantageous. With a short holding period (speculative sales within ten years are subject to income tax), the choice of depreciation method should be discussed with a tax advisor.

The declining balance method is an effective tool for optimizing returns on new construction projects. Investors in the Nuremberg metropolitan region who purchase a new condominium as an investment between 2023 and 2029 should factor this tax benefit into their profitability calculations and work with a tax advisor to determine the optimal depreciation schedule and the timing of the switch to straight-line depreciation in advance.

Declining-Balance Depreciation and Special Depreciation under Section 7b of the German Income Tax Act (EStG)

In addition to declining-balance depreciation under Section 7(5a) of the German Income Tax Act (EStG), new rental residential buildings may qualify for special depreciation under Section 7b of the German Income Tax Act (EStG) under certain conditions: This allows for an additional depreciation of 5 percent of the construction costs in each of the first four years following completion-in addition to the regular depreciation. The prerequisite is that the apartment is newly constructed, is rented out, and the construction costs per square meter do not exceed a maximum limit. Declining-balance depreciation and § 7b special depreciation cannot be used simultaneously-investors must choose which method is more advantageous in their specific tax situation.

For project developers and investors in the Nuremberg metropolitan region who are constructing new rental apartments, we recommend a comparative tax analysis of both models before construction begins. Since the special depreciation is tied to construction cost caps-which are easily exceeded in Nuremberg given construction price levels of 3,000 to 4,500 euros per square meter of gross floor area-the declining balance depreciation is often the more accessible alternative in the region. Early consultation with a tax advisor and the financing bank ensures that the chosen depreciation method is properly documented and tax-optimized.

Back to the Real Estate Glossary.