Impairment

Depreciation - Depreciation refers to a decrease in the market value of a property that can result from aging, structural defects, changing market conditions, or adverse environmental factors. For owners, buyers, and investors, the correct assessment of depreciation is crucial-it influences purchase price negotiations, appraisal results, tax planning options, and the long-term value retention of the real estate portfolio.

Causes and Types of Depreciation

The reasons for depreciation in real estate can be divided into several categories.

The most common form is age-related depreciation: As a building ages, the building fabric, building services, and fixtures lose value. Depending on the construction method and state of maintenance, this process progresses more quickly or more slowly. In standardized real estate valuation (ImmoWertV), age-related depreciation is calculated based on the total useful life and the remaining useful life. A solid-construction house typically has a total useful life of 80 years-if it is 40 years old and has not been modernized, the calculated depreciation amounts to approximately 50 percent of the construction cost. Modernizations (roof, facade, heating, plumbing) can extend the remaining useful life and reduce the calculated depreciation.

Structural defects and damage lead to another form of depreciation. Water damage, cracks in the masonry, outdated electrical systems, or contamination from hazardous substances such as asbestos, PCBs, or formaldehyde significantly reduce the value. Particularly relevant here is the so-called commercial depreciation: Even after professional repair of damage, a value discount often remains because potential buyers harbor a latent distrust of properties that have previously been damaged. For properties with known fire damage, extensive mold infestation, or structural cracks, experience shows that this discount amounts to 5-20% of the market value.

Changes in the surrounding area can also lower a property’s value: a new road, the removal of infrastructure, the establishment of disruptive commercial operations, or increasing noise pollution all have a negative impact on the micro-location. Similarly, easements such as rights of way, utility rights, or third-party residential rights reduce the value, as they restrict the owner’s freedom of use.

Finally, general market trends influence property value: If demand in a region declines-due to outmigration, economic decline, or rising interest rates-prices fall regardless of the condition of the individual property. During the interest rate hike in 2022/2023, residential properties in many German cities lost 10-20% of their value within a short period of time.

Energy-Related Depreciation

Since the tightening of the Building Energy Act (GEG), a new form of depreciation has come into focus: energy-related depreciation. Buildings in energy classes F, G, and H-with a final energy demand exceeding 100 kWh/m²-are increasingly commanding lower prices on the Nuremberg market compared to renovated comparable properties. The price difference between a Class A building and a Class H building can amount to 50,000-150,000 euros in the single-family home sector. Buyers factor in renovation costs-and banks assess poorly renovated buildings with higher loan-to-value discounts.

Tax Treatment of Depreciation

For owners who rent out their property, depreciation also plays a role in tax matters. Under the depreciation allowance (AfA), the building portion can be depreciated on a straight-line basis over its useful life. For residential buildings completed after 2023, the AfA rate is 3% annually (Section 7(4) EStG); for older buildings, it is generally 2%. Exceptional depreciation due to damage can, under certain conditions, be claimed as deduction for exceptional wear and tear (AfaA) under Section 7(1) Sentence 7 of the German Income Tax Act (EStG)-proof requires a damage assessment report. We recommend consulting a tax advisor for this.

Practical Tip for Nuremberg and Franconia

In the Nuremberg metropolitan region, we observe that regularly maintained buildings experience significantly less depreciation than neglected properties. Especially in sought-after locations such as Nuremberg’s Südstadt, Johannis, or Erlangen-Zentrum, ongoing modernization pays off because high demand supports the value of well-maintained properties.

Those who wish to realistically assess the depreciation of their property can consult the Real Estate Market Report from the Middle Franconia Appraisal Committee. It contains data on standard remaining useful lives and regional property value factors-broken down by location and building type. For older buildings in Nuremberg from the 1950s to the 1970s with galvanized steel pipes, old facades, and outdated heating systems, we recommend a structured maintenance plan to slow down depreciation and keep the property competitive on the market.

Frequently Asked Questions

How is depreciation calculated in a real estate appraisal?

In property value assessment, age-related depreciation is calculated on a straight-line basis over the total useful life. For a solid-construction house with a total useful life of 80 years and an age of 30 years, this results in a depreciation of approximately 37.5 percent of the building’s property value. Modernizations can extend the remaining useful life and reduce the calculated depreciation. Appraisers use recognized modernization tables (e.g., according to Ross/Brachmann) to quantify the impact of individual measures on the remaining useful life.

What is the difference between age-related depreciation and commercial depreciation?

Age-related depreciation accounts for natural wear and tear due to use and aging-it is calculated and presented transparently in the appraisal report. Market-related depreciation, on the other hand, describes the remaining reduction in value after damage has been repaired-such as after water damage or a fire. Buyers view such properties more skeptically despite complete renovation, which is reflected in the achievable price. Market-related depreciation is more difficult to quantify and is estimated by the appraiser based on market reactions.

Can I stop my property from depreciating?

Age-related depreciation cannot be completely stopped, but it can be significantly slowed through targeted maintenance and modernization. Energy-efficient renovations, the replacement of outdated building systems, and a well-maintained appearance extend the remaining useful life and stabilize the market value. Regular maintenance is more cost-effective than postponing major renovations-experience shows that every euro of maintenance costs three to five times as much once the damage has occurred.

What discount can I negotiate on the purchase price?

For properties with verifiable defects or a significant need for modernization, purchase price discounts of 10-30% of the comparable value may be realistic. These are based on the estimated renovation costs for necessary measures as well as a risk premium for unforeseen damage. We assist buyers in Nuremberg and the metropolitan region in evaluating properties in need of renovation and negotiate a reasonable purchase price based on well-founded cost estimates.

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