Capital costs

Capital Expenditures - Capital expenditures include all costs incurred for the acquisition, construction, or major renovation of a property. They must be distinguished from ongoing operating costs and form the basis for calculating tax depreciation (AfA).

Composition and Distinction from Operating Costs

The investment costs of a property consist of several components that must be fully accounted for in an overall economic assessment.

The purchase price is the largest single item. It includes the contractually agreed price for the land and the building. For tax depreciation purposes, the purchase price is split into a land component and a building component, as only the building component is eligible for depreciation.

Incidental purchase costs significantly increase the total investment. In Bavaria, they include real estate transfer tax (3.5 percent of the purchase price), notary and land registry fees (approximately 1.5 to 2 percent), and, if applicable, the real estate agent’s commission. In total, incidental purchase costs in the Nuremberg metropolitan region typically range between 7 and 10 percent of the purchase price-and even higher in the case of a commission-based sale with a 3.57 percent brokerage fee for the buyer.

Renovation and modernization costs are considered investment costs if they significantly improve or expand the building beyond its current condition. These include, for example, the installation of a new heating system, the energy-efficient renovation of the building envelope, or the creation of additional living space. In contrast, pure maintenance measures-that is, work that preserves the existing condition-are considered operating expenses and are immediately deductible as business expenses.

Financing costs are treated separately in the investment calculation. Loan interest is not included in the acquisition costs for tax purposes but is deducted as an income-related expense in the year of payment. Principal repayment, on the other hand, does not constitute a tax-deductible expense, as it merely represents a reallocation of cash into real estate assets.

The clear distinction between investment costs and operating costs is of great importance for tax purposes: investment costs are capitalized and depreciated over the building’s useful life (typically two to three percent per year for residential buildings), while operating costs can be fully claimed for tax purposes in the year they are incurred.

Investment Analysis and Profitability Analysis

A sound investment analysis compares the total investment costs with the expected returns, taking into account the time value of the capital invested. The most common methods are the net present value (NPV) method, which discounts all future income and expenses to the time of investment, and the return calculation based on the net rental yield or the return on equity. We recommend that investors always base their return calculations on the total investment costs, including all ancillary costs, as a calculation based solely on the purchase price systematically overestimates the actual return.

Practical Tip for Nuremberg and the Metropolitan Region

In the Nuremberg metropolitan region, investment costs vary considerably depending on the type of property and location. For existing apartments in neighborhoods such as Maxfeld, Wöhrd, or Erlangen-Süd, purchase prices are high, while ancillary purchase costs in Bavaria are moderate thanks to the comparatively low real estate transfer tax rate of 3.5 percent. For older existing properties-such as post-war buildings in Schweinau, Gibitzenhof, or Fürth-significant renovation costs must often be factored in, which can increase the investment costs well beyond the purchase price alone. We recommend preparing a detailed breakdown of all expected investment costs before purchasing and, in particular, having the renovation costs estimated by a building expert. This allows for a realistic calculation of the actual total investment and a reliable assessment of the expected return-before the notarial contract is signed.

Frequently Asked Questions

What are the incidental purchase costs in Bavaria?

In Bavaria, incidental purchase costs consist of the real estate transfer tax (3.5 percent), notary and land registry fees (approximately 1.5 to 2 percent), and, if applicable, the real estate agent’s commission. Since the introduction of commission sharing under the “buyer pays” principle in purchase law (2020), buyers and sellers typically split the real estate agent’s commission equally. In Nuremberg, the standard total commission is 7.14 percent including VAT, meaning the buyer pays 3.57 percent.

Can I immediately deduct investment costs from my taxes?

Investment costs in the strict sense-that is, acquisition and construction costs-cannot be deducted immediately but are depreciated over the building’s useful life. Only certain maintenance expenses that preserve the existing condition are immediately deductible as income-related expenses in the year of payment. The so-called 15-percent limit for acquisition-related production costs (Section 6(1)(1a) of the German Income Tax Act) must be taken into particular account here.

How do I calculate the actual return on investment, taking all investment costs into account?

For a realistic return calculation, we divide the annual net rent (excluding non-apportionable costs and the maintenance reserve) by the total investment costs-that is, the purchase price plus all ancillary costs plus planned renovation costs. This net rental yield currently ranges between 2.5 and 5 percent in the Nuremberg metropolitan region, depending on location and property condition. We also recommend calculating the return on equity while taking debt financing into account, as the leverage effect can significantly alter the return on invested equity.

What are acquisition-related construction costs, and why are they so important?

The so-called 15-percent limit under Section 6(1)(1a) of the German Income Tax Act (EStG) is a tax provision that often surprises investors and buyers: If the costs of repair and modernization measures within the first three years after acquisition exceed 15 percent of the building’s purchase price, these expenses are treated as production costs for tax purposes-even if they are strictly speaking maintenance measures. They must then be capitalized and depreciated via depreciation, rather than being immediately deducted as income-related expenses. For a building purchase price of 200,000 euros, this means: Anyone who spends more than 30,000 euros net on renovations in the first three years loses the immediate tax deduction for that amount. Investors should be fully aware of this limit when purchasing properties in need of renovation in the Nuremberg portfolio and coordinate the timing of construction measures with a tax advisor.

Investment Costs Compared: New Construction vs. Renovation

When deciding between purchasing a new construction and renovating an existing property, total investment costs play a central role. New constructions in the Nuremberg metropolitan region will cost between 4,500 and 6,500 euros per square meter in prime locations in 2025/2026-in return, there are no renovation costs, and energy efficiency meets current standards. Existing properties have a lower starting price (€2,800 to €4,500 per square meter), but often require renovation investment costs of €500 to €1,500 per square meter for energy-efficiency measures, bathroom renovations, and electrical system upgrades. The total investment costs for both options therefore often end up being similar-it is crucial to obtain a reliable cost estimate from an independent building expert familiar with the property before purchasing.

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