Investment Tax Credit

Investment Allowance refers to a non-repayable government grant awarded to investors for certain investments in tangible assets, which is either credited directly against their tax liability or paid out in cash. In the real estate sector, the Investment Allowance was historically particularly relevant for new residential construction and modernization projects in the new federal states, and has since been phased out in this traditional form. Current support instruments such as the declining balance depreciation, KfW grants, and the JStG 2022 have taken its place.

History and Significance of the Investment Allowance in Germany

The investment allowance has a long history in Germany as an economic policy instrument:

• Border Zone Areas (until 1989): Under the border zone support program, investors in certain regions near the inner-German border received investment allowances to compensate for economic disadvantages.
• New Federal States (1991-2013): Following reunification, the Investment Allowance Act (InvZulG) created comprehensive incentives for investments in Saxony, Thuringia, Saxony-Anhalt, Brandenburg, and Mecklenburg-Western Pomerania. For eligible building investments and renovations, grants of 5-27% of the invested costs were awarded.
• Expiration in 2013: The last Investment Allowance Act for the new federal states expired on December 31, 2013, and was not extended. Since then, there has been no longer any traditional investment allowance in the real estate sector.

For real estate projects in the old federal states-including Bavaria and the Nuremberg metropolitan region-the investment allowance was not relevant in the traditional sense, unless investments were made in the eligible regions.

Current Alternatives to the Investment Allowance

Even though the traditional investment allowance no longer exists, there are comparable incentive instruments today that have similar economic effects:

Declining-balance depreciation (Section 7(5a) of the German Income Tax Act (EStG)): For new buildings completed after October 1, 2023, landlords can use declining-balance depreciation of 5% per annum on the residual value instead of straight-line depreciation (2% per annum). This results in significantly higher depreciation in the first few years and thus tax relief-economically similar to an allowance. The key advantage: The higher depreciation in the first few years significantly improves the investment’s cash flow.

Special Depreciation under Section 7b of the German Income Tax Act (EStG): For the construction of new rental apartments, an additional 5% (total 20%) of the acquisition and construction costs may be depreciated in the year of completion and the three subsequent years, provided certain cost limits are met (currently €5,200/m² in construction costs). This special depreciation has undergone several changes since its introduction in 2018; current information should be obtained from a tax advisor.

KfW Grants (BEG): For energy-efficient renovations to achieve Efficiency House standards (EH 40, EH 55, EH 70) and for individual measures, KfW provides non-repayable grants of up to 45% of eligible costs. These grants are the closest equivalent to the original investment allowance: they are direct cash inflows, independent of the recipient’s tax situation.

§ 35c EStG - Tax Reduction for Renovation Measures: For owner-occupied residential buildings, energy-efficient renovation measures (windows, insulation, heating, photovoltaics) can be deducted directly from the tax liability over three years, amounting to a total of 20% of the costs (max. 40,000 euros per property). Economically, this corresponds to a direct investment allowance.

Distinction: Investment Allowance vs. Investment Deduction (IAB)

The Investment Deduction (IAB) under § 7g EStG is not a government grant, but a tax benefit for smaller businesses (e.g., landlords with business structures): It allows up to 50% of the planned investment costs to be deducted from taxable income even before the actual investment is made. The IAB does not apply to pure capital investors with income from renting and leasing (Section 21 EStG)-in this case, depreciation (AfA) and the deduction of income-related expenses serve as alternative instruments.

Practical Tip for Property Owners in Nuremberg and Franconia

Anyone investing in new rental housing construction in the Nuremberg metropolitan region should keep the current declining-balance depreciation and the special depreciation under Section 7b of the Income Tax Act (EStG) in mind-both instruments offer a liquidity advantage similar to that of a traditional investment allowance. We recommend coordinating the planning of such projects with a tax advisor at an early stage, as cost limits and deadlines are tight and the framework conditions frequently change.

For existing properties in Nuremberg and Franconia, owners should check before planned renovations whether and to what extent BAFA subsidies, KfW loans, or tax deductibility under Section 35c of the German Income Tax Act (EStG) can be utilized. Combining various subsidies is often possible and significantly reduces net investment costs.

Frequently Asked Questions

Is the investment allowance for real estate still available today?

No, the traditional investment allowance for real estate under the InvZulG expired in 2013. Current funding instruments include the declining balance depreciation, the special depreciation under Section 7b of the Income Tax Act (EStG), and KfW grants under the Federal Funding for Efficient Buildings (BEG) program.

For which regions did the investment allowance historically apply?

Mainly for the new federal states (Saxony, Thuringia, Saxony-Anhalt, Brandenburg, Mecklenburg-Western Pomerania) as well as for certain areas in Berlin. Bavaria, and thus Nuremberg, lay outside the eligible area; real estate investors in the Franconian region were generally unable to take advantage of this subsidy.

What is the difference between an investment allowance and depreciation?

An investment allowance is a direct cash inflow (non-repayable grant) that is granted regardless of the actual tax burden. Depreciation (AfA), on the other hand, reduces taxable income; its concrete benefit depends on the individual tax rate. At a tax rate of 42%, 1 euro of additional depreciation is equivalent to 0.42 euros in savings-a direct investment allowance of 1 euro would therefore be significantly more valuable.

Can I still claim investment allowances retroactively from earlier programs today?

No. The deadlines for claiming investment allowances under the expired InvZulG have passed. Anyone who has not exercised historical subsidy claims can no longer claim them retroactively. We recommend checking existing asset inventories for older properties to ensure that former allowances were correctly recorded.

Back to the Real Estate Glossary.