Income from renting

Income from Rentals - Income from rentals and leases (Section 21 of the German Income Tax Act) is one of the seven categories of income under German income tax law. It includes all income from the rental of land, buildings, and parts of buildings - minus business expenses (financing interest, depreciation, maintenance, and management). Rental income is taxed at the owner’s personal income tax rate and reported in Schedule V of the income tax return.

Calculation of Income

Income from rental:

• Base rent (net rent)
• Service charges/utility costs (if paid by the tenant - offset against expenses)
• One-time income (e.g., tenant buyout, severance payment)

Less income-related expenses:

• Building depreciation: 2% per year (built in 1925 or later), 2.5% (built before 1925), 3% (new construction from 2023 onward, § 7(4) EStG)
• Financing interest: Loan interest for purchase or renovation loans
• Maintenance costs: Repairs, maintenance - immediately deductible (for maintenance expenses)
• Administrative costs: Property management, tax consulting, legal consulting
• Travel expenses: Trips to the rental property (€0.30 per km)
• Property tax: To the extent not passed on to tenants
• Insurance: Building insurance, homeowner’s liability insurance

Result: Surplus (positive) or loss (negative) from renting and leasing

Overview of income-related expenses - Schedule V (§ 21 EStG)

Type of income-related expense	Deductibility	Special feature
Building depreciation	2-3% annually	Only building portion, not land
Financing interest (interest portion)	Immediately	Principal repayment is not deductible
Maintenance costs (upkeep expenses)	Immediately	No improvement in standard
Modernization costs (construction costs)	Over remaining useful life	If standard is raised
Property management costs	Immediately	Also pro-rated WEG maintenance fees
Property tax (non-apportioned portions)	Immediately	Only to the extent not passed on to tenants
Building insurance	Immediately	Fire protection, liability
Travel expenses to the property	€0.30/km	One-way trip suffices
Tax consulting costs	Pro-rata	Only on income attributable to rental and leasing
15% limit (Section 6(1)(1a) EStG)	Not immediately	If > 15% in the first 3 years after purchase

Tax-Related Special Features

• Loss Offset: Negative rental income can be offset against positive income from other sources (e.g., salary) - this reduces the overall tax burden
• 10-Year Period: The capital gain from the sale of a rented property is tax-free after a 10-year holding period (Section 23 EStG)
• Maintenance expenses vs. construction costs: Repairs (maintenance expenses) are immediately deductible; renovations with standard depreciation (construction costs) must be depreciated over the useful life
• 15% limit (Section 6(1)(1a) EStG): If repair costs in the first 3 years after purchase exceed 15% of the building’s acquisition cost, they are treated as acquisition-related production costs (not immediately deductible)

Reduced Rent and Tax Consequences

Anyone who rents out an apartment at a rent below the local market rate-for example, to family members-must observe the 66% limit: If the agreed-upon rent is at least 66% of the local comparable rent, the income-related expenses can be fully deducted. If it is below that, the income is divided into a paid and an unpaid portion-only the paid portion qualifies for the deduction of income-related expenses. In Nuremberg, where market rents have risen significantly in recent years, landlords renting to family members should regularly check the 66% threshold against the current rent index and adjust the rent if necessary.

Practical Tip for Property Owners in Nuremberg and Franconia

Landlords in the Nuremberg metropolitan region should carefully document their income-related expenses-every euro reduces the tax burden. Especially in the first few years after purchasing an investment property, a tax loss often arises (high financing interest + depreciation > rental income), which reduces taxable income. Be mindful of the 15% limit: If you undertake extensive renovations after purchasing an apartment in Nuremberg’s Südstadt or Gostenhof, the costs must not exceed 15% of the building’s purchase price in the first 3 years-otherwise, they will not be immediately deductible but will be depreciated over 40-50 years. Therefore, plan major renovations either before the purchase (as part of the purchase price) or after the 3-year period has expired to ensure the immediate tax deduction.

Frequently Asked Questions

Do I have to pay taxes on rental income even if I incur a loss?

You must report the income on Form V-regardless of whether you have a surplus or a loss. In the case of a loss (marketing expenses > rental income), you actually benefit: The loss is offset against your other income (e.g., salary) and reduces your total tax burden. In the first few years after purchasing a property, tax losses from renting are common and intentional-especially with high financing interest rates and substantial depreciation, they are a key component of a real estate tax strategy.

What can I deduct as business expenses?

All expenses incurred as a result of renting out the property: depreciation (2-3% of the building’s value), loan interest (not principal payments!), maintenance costs, property management, property tax, insurance, travel expenses to the property (€0.30/km), tax advisory fees (pro-rata), account maintenance fees (€16 flat rate or proof of expenses), legal advisory fees for tenant disputes, and brokerage fees for tenant search. Keep all receipts for at least 6 years-the tax office can request receipts retroactively for up to 10 years.

How is the capital gain from the sale of a rented property taxed?

Within the 10-year capital gains period (§ 23 EStG), the profit (sale price minus acquisition costs minus selling costs) is taxed at your personal income tax rate - with a marginal tax rate of 42%, this can be significant. After the 10-year period has expired, the capital gain is tax-free. Note: Depreciation reduces the tax-deductible acquisition cost (fictitious carryover), which increases the calculated gain if the property is sold within the 10-year period. In the case of commercial real estate trading (three-property limit), the tax exemption after 10 years is completely eliminated.

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