Straight-line depreciation

Straight-line depreciation is the most common method under tax and commercial law for recognizing the loss in value of buildings as an expense on a straight-line basis over their useful life-each year, the same percentage of the acquisition or construction costs is deducted. For landlords, it is a key tool for tax optimization: The annual depreciation reduces the taxable surplus from renting and leasing, thereby saving on income tax. The building is depreciated over a legally defined useful life, not the land portion.

Legal Basis and Depreciation Rates

Straight-line building depreciation is governed by Section 7(4) of the German Income Tax Act (EStG). For residential buildings completed after December 31, 2022, a depreciation rate of 3% per annum applies (corresponding to a 33-year useful life). For buildings completed before 2023, the rate is 2% per annum (50 years). For buildings completed before January 1, 1925, a rate of 2.5% applies (40 years). Commercially used buildings are depreciated at 3% per annum. The tax base is the acquisition cost of the building-excluding the land portion, which is not depreciable.

Determining the Tax Base

Since the land and building are acquired together, the purchase price must be allocated. The tax authorities accept an allocation based on the asset value method or on the so-called guidance for allocating the purchase price provided by the Federal Ministry of Finance. In sought-after locations such as downtown Nuremberg or Erlangen, a high proportion is often attributable to the land value (40-60% of the purchase price), which reduces the depreciable tax base and thus the tax savings. Buyers should carefully review the allocation in the notarial contract and, if necessary, obtain an expert opinion on the purchase price allocation-this carries more weight with the tax office than the Federal Ministry of Finance’s (BMF) standard guideline, which often assigns very high land values.

Tax Implications of Depreciation

Depreciation (AfA) acts as a direct cost deduction from rental and leasing income. An example: If a multi-family home in Nuremberg was purchased for 1.2 million euros, of which 800,000 euros were attributable to the building, the annual straight-line depreciation at 2% per annum amounts to exactly 16,000 euros. At a personal tax rate of 42%, this results in an annual tax savings of 6,720 euros-a total savings of approximately 336,000 euros over the entire 50-year depreciation period. The higher the building’s share of the acquisition costs and the higher the personal tax rate, the more valuable depreciation is as a planning tool.

Interaction with Other Depreciation Methods

In addition to straight-line depreciation, there are special tax provisions: The declining-balance depreciation for new buildings (Section 7(5a) of the German Income Tax Act (EStG), effective since 2023) allows for higher deductions in the first few years, which then decrease. For renovations in redevelopment areas (Section 7h of the German Income Tax Act) or listed buildings (Section 7i of the German Income Tax Act), increased depreciation rates of up to 9% apply in the first eight years and 7% in the following four years. Owners who can choose between these methods should consult with their tax advisor, as switching methods during the holding period is only possible to a limited extent. In particular, the combination of the historic preservation depreciation allowance and the purchase of a renovated older building in Nuremberg can significantly reduce the effective tax burden in the first few years.

Practical Tip for Property Owners in Nuremberg and Franconia

Especially for older buildings in Nuremberg-many of which date back to the Wilhelminian era or the 1950s through 1970s-accurately determining the year of construction and the remaining useful life is crucial for tax purposes. In the case of a Wilhelminian-style apartment building in Gostenhof, built in 1900 and acquired in 2019, 119 years of the depreciation period have already elapsed; nevertheless, tax depreciation starts anew upon acquisition, based on the actual purchase price paid.

In addition, historic buildings in Nuremberg’s Old Town or in historic districts such as Wöhrd and Pegnitzvorstadt are often particularly attractive to investors because they allow for increased depreciation under Section 7i of the German Income Tax Act (EStG). This requires coordination with the historic preservation office and the availability of a corresponding certificate. We recommend consulting a tax advisor before purchasing an investment property, who can calculate the actual tax savings from depreciation in concrete terms and compare them with other investment options.

Frequently Asked Questions

Can I also depreciate the land portion?

No. Land is not subject to tax depreciation because it does not wear out. Only the building may be depreciated. The correct allocation of the purchase price between the building and land components is therefore significant for tax purposes.

What happens to the depreciation if I sell the house?

Upon sale, the depreciation taken is not “repaid” as long as the property was held as part of private assets and the 10-year speculation period has expired. In the business sector or in the event of a sale within the speculation period, however, the depreciation may increase the taxable capital gain.

Can I also use the depreciation for owner-occupied real estate?

No. The tax-deductible building depreciation under Section 7 of the Income Tax Act (EStG) applies only to rented or business-use real estate. Owner-occupied residential property cannot be depreciated for tax purposes.

Is it worth it to claim higher depreciation through declining-balance depreciation or historic preservation depreciation?

That depends on your personal tax rate, the holding period, and the investment amount. Declining-balance depreciation (Section 7(5a) of the German Income Tax Act, 5% in the first year) offers higher deductions in the early years, which has a positive impact on cash flow if your tax rate is high. The historic preservation depreciation under Section 7i EStG (9% over 8 years, 7% over 4 years) applies only to renovation costs but can significantly increase the effective return on equity for high-income buyers. We recommend having a tax advisor calculate both scenarios using specific figures before making a decision.

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