Depreciation for Historic Preservation

Historic Preservation Depreciation - Historic preservation depreciation is a special tax deduction for construction work on historic buildings that provides significant tax benefits on renovation costs to investors under Sections 7h and 7i of the German Income Tax Act (EStG) and to owner-occupiers under Section 10f of the EStG.

What exactly does the historic preservation depreciation mean?

The historic preservation depreciation (depreciation for wear and tear) allows owners of historic buildings to write off the costs of renovation measures for tax purposes over a significantly accelerated period. In this way, the legislature creates a financial incentive to preserve and restore historic buildings, which would often be left to decay due to high renovation costs without such support.

For investors who rent out a historic property, Sections 7h and 7i of the Income Tax Act (EStG) apply. According to these provisions, the eligible construction costs may be depreciated at a rate of 9 percent annually for the first eight years and 7 percent annually for the following four years. Thus, 100 percent of the recognized renovation costs are claimed for tax purposes within twelve years. This depreciation applies in addition to the regular building depreciation on the existing structure.

For owner-occupiers, Section 10f of the EStG applies. Here, 90 percent of the eligible renovation costs can be deducted as special expenses over ten years at a rate of 9 percent per year. Although these deductions are smaller than those for investors, they also offer owner-occupiers a significant tax advantage that is not available for regular residential properties.

A key requirement for claiming the historic preservation depreciation is coordination with the relevant historic preservation authority before construction begins. The planned renovation work must be coordinated with and approved by the authority. Upon completion of the work, the historic preservation authority issues a certificate in accordance with Sections 7h/7i of the Income Tax Act (EStG), which the tax office requires as the basis for tax recognition. Without this certificate, no historic preservation depreciation is possible.

Only construction costs that serve to preserve the building as a historic monument or to ensure its sensible use are eligible. These typically include the renovation of the facade, the replacement of the roof while retaining historical materials, the repair of wooden beam ceilings, the restoration of historic windows and doors, and the installation of modern building services within the listed structure. The purchase price of the land alone and the portion representing the existing value of the old building are not eligible.

Tax Impact and Calculation Example

The historic preservation depreciation (AfA) has the greatest impact for investors with a high personal tax rate. A calculation example illustrates this: If the recognized renovation costs amount to 300,000 euros, an investor can claim 27,000 euros (9 percent) annually for the first eight years and 21,000 euros (7 percent) annually for years nine through twelve. With a marginal tax rate of 42 percent, this results in annual tax savings of approximately 11,340 euros in the first eight years alone.

It is important to note that the historic preservation depreciation applies only to the portion of the renovation costs. The portion of the building’s purchase price continues to be depreciated at the standard rate of 2 to 2.5 percent annually. Both depreciation methods run in parallel and are taken into account in rental and leasing income. Our network of experts recommends planning the tax structure of a historic property early on with a specialized tax advisor.

Practical Tip for Owners in Nuremberg and Franconia

Nuremberg boasts one of Bavaria’s most significant collections of historic buildings. Despite severe destruction during World War II, many buildings were faithfully reconstructed and are now listed as historic monuments. Particularly in the Old Town, on the Sebalder and Lorenzer sides, around the Kaiserburg, and in the Wilhelminian-style residential neighborhoods of Gostenhof, St. Johannis, and Maxfeld, there are numerous listed residential and commercial buildings.

Listed properties also offer attractive investment opportunities in the surrounding cities of Fürth (home to one of Germany’s best-preserved Wilhelminian-style districts), Erlangen, and Bamberg (a UNESCO World Heritage Site). Our network of experts recommends that, when purchasing a historic property in the region, you first consult the list of historic buildings at the Bavarian State Office for the Preservation of Historical Monuments and coordinate the specific planned measures with the local historic preservation authority of the respective city before signing any binding purchase agreements.

Frequently Asked Questions

What requirements must be met for the historic preservation depreciation allowance (AfA)?

The building must be listed on the respective state’s list of historic buildings or be located in a designated redevelopment area. The renovation measures must be coordinated with and approved by the historic preservation authority before construction begins. Upon completion of the work, a certificate from the authority is required, which must be submitted to the tax office. Without this certificate, the tax office will not recognize the increased depreciation.

Can the historic preservation depreciation be combined with KfW funding?

In principle, a combination is possible; however, the same costs may not be subsidized twice. If a measure is funded through a KfW program, the subsidized portion must be excluded from the depreciation base. In practice, it is advisable to consult with a tax advisor to determine which allocation of the measures results in the highest total subsidy.

Does the historic preservation depreciation also apply to condominiums in a historic building?

Yes, condominiums in historic multi-family buildings are also eligible, provided the entire building is listed as a historic landmark. The depreciable renovation costs are allocated to the individual condominium owners on a pro-rata basis according to their co-ownership shares. This makes historic condominiums particularly attractive to investors who wish to benefit from the increased depreciation with a manageable investment volume.

What happens to the historic preservation depreciation allowance if I sell the property?

The historic preservation depreciation is tied to the individual owner: it is available to the respective owner for the duration of their ownership. If the property is sold, the remaining years of depreciation do not transfer to the buyer-the buyer can only claim new historic preservation depreciation on the renovation costs they personally incur after the purchase. If the previous owner has already carried out all renovation measures, the buyer is no longer entitled to the historic preservation depreciation. This special feature must be taken into account when pricing historic properties: Properties for which the depreciation years are still ongoing are significantly more attractive to taxable investors than fully depreciated properties.

Extended Special Depreciation under Section 7h of the Income Tax Act (EStG): Redevelopment Areas

In addition to the classic historic property under Section 7i of the Income Tax Act (EStG), Section 7h of the Income Tax Act (EStG) grants comparable special depreciation allowances for buildings in formally designated redevelopment or urban development areas. In these areas-which are designated by the municipality through a bylaw-owners can also benefit from increased depreciation if their construction measures serve the purpose of redevelopment and are certified by the competent authority. In Nuremberg, there are several designated redevelopment areas, for example in Gostenhof or in the historic old town. Owners renovating in such areas should check early on whether their measures qualify under Section 7h of the German Income Tax Act (EStG)-sometimes this route is easier to pursue without historic preservation requirements than the traditional historic preservation depreciation (AfA).

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