Save taxes with real estate via AfA

The tax framework for real estate investors has continued to evolve since the original publication of this article. In particular, there have been important changes regarding the depreciation of real estate assets (AfA). For residential buildings completed from 2023 onward, an increased straight-line depreciation rate of 3 percent per year now applies. This allows owners of newly constructed properties to claim their acquisition and construction costs for tax purposes more quickly.

In addition, declining-balance depreciation for buildings (degressive building AfA) has been reintroduced for certain newly constructed residential properties. This provides investors with another option to reduce their tax burden during the first years after completion.

Special tax requirements also continue to apply when renting properties to family members. The frequently cited 66 percent threshold of the local comparable rent remains relevant, but it has been supplemented by more differentiated rules: If the rent is between 50 and 66 percent of the local comparable rent, the intention to generate income must be reviewed. If the rent is lower, the deduction of income-related expenses may be restricted accordingly.

An investment in real estate is always a good idea. In times of rising inflation, real estate as a capital investment offers protection against inflation, and with rental income you can build up assets in addition to the increase in value of the property. Yet that's not all: you can also save taxes with a property. This is made possible by a regulation under German tax law, known in technical terms as Absetzung für Abnutzung (AfA) (depreciation for wear and tear).

Hidden behind this somewhat cryptic term is the concept that the tax authorities allow you to gradually deduct an expensive purchase from your taxes over several years - instead of writing it all off at once. This is possible because the tax office assumes that consumer goods, including real estate, lose value over time. Citizens should be able to compensate for this loss in value with the help of depreciation by deducting a portion of the acquisition costs from their taxes over a certain period of time. These costs are entered annually under income-related expenses and this amount is deducted from taxable income.

This is possible for purchases that cost you more than 800 euros without VAT - regardless of the item: For many consumers, computers, photo cameras or office furniture for the home office are conceivable. However, you must use the item at least largely for professional purposes. Then you can claim it as income-related expenses in your tax return. However, if you exceed the 800-euro mark, you can do so gradually rather than all at once.

Using depreciation, you spread the acquisition costs over a certain useful life. This period depends on the item purchased and is officially defined: You can find an overview on the homepage of the Federal Ministry of Finance, where the AfA tables tell you exactly over which period you can claim which goods for tax purposes. For example, a camera has a useful life of seven years and office furniture 13 years.

As the owner of a property, the tax depreciation regulations come into play for you when it comes to acquisition and production costs. You can claim these as advertising costs on your tax return, but only on a pro-rata basis. However, this is not possible if you use the house or apartment yourself. Nor can you enter depreciation for the costs of a property.

You must therefore use the property commercially or rent it out. In addition to the purchase price for the property itself, acquisition costs also include other costs incurred in connection with the purchase, including notary fees, possibly a broker's commission, land transfer tax, appraisal and surveyor costs, and travel and telephone expenses.

Basically, there are two different ways to claim immovable property against the tax office: straight-line or declining-balance depreciation. Nowadays, real estate is usually depreciated on a straight-line basis. This means that over the fixed useful life of an asset, the same amount is claimed annually on the tax return. Owners of newer properties had to depreciate on a declining-balance basis if their building application or purchase agreement was dated before January 1, 2006. Under this form of depreciation, newly constructed real estate could be depreciated at particularly high rates in the first few years after construction.

The percentage rate at which you can claim income-related expenses for the acquisition or construction of a property against the tax authorities depends on the year of construction of the building. You can deduct 2.5 percent of the acquisition costs annually over a period of 40 years if the property was built before December 31, 1924. For all buildings constructed later, i.e. new buildings from 2006 and old buildings from 1925, the percentage is lower, but you can claim the costs over a longer period: You can claim two percent of the costs as income-related expenses on your tax return every year for 50 years.

If we assume a new building from 2006 onwards or an old building from 1925 onwards, then, as explained above, two percent of the acquisition or production costs can be deducted from taxes each year over a period of 50 years. If we use this simple formula as a basis, you could, for example, claim 20,000 euros per year against tax if the acquisition costs were one million euros. If you spent 750,000 euros on your property, the annual amount would be 15,000 euros, at 450,000 euros it would be 9,000 euros and at 150,000 euros 3,000 euros.

If you want to calculate in more detail which costs you can deduct from your taxes each year, platforms such as immowelt provide you with a depreciation calculator.

Depreciation is possible from the date of purchase or completion of a property - until you sell the building again or the period of use of 40 or 50 years is exceeded. From then on, you as the owner no longer have the possibility of benefiting from depreciation via AfA. However, if you sell the property, the depreciation period is rolled back for the new owner. The new owner can then claim his or her acquisition costs against tax for a further 40 or 50 years within the framework of AfA.

By the way, the depreciation is calculated in full months. If you bought your property in May of a year, for example, you can claim depreciation for eight months of that year. If you sell the property again, for example in March, you can still deduct three months of depreciation costs.

There are exceptions to the above rules. If the useful life of a building is shorter than the estimated 40 or 50 years, for example, you can apply to the tax office to have your property depreciated over a shorter period at a higher annual percentage of the acquisition costs. However, for such an application, you will need an expert opinion that certifies this shorter useful life in written form.

An exception also applies if a property in your possession is a listed building. If such a building is due for renovation, you can claim these costs at significantly higher, i.e. declining-balance depreciation rates. In this case, it doesn't even matter whether you use the property yourself or rent it out.

You must be particularly careful if you rent out a property to relatives and, in order to oblige the relatives, charge particularly low rent. The costs may not fall below 66 percent of the local comparative rent. Otherwise, you may suffer some tax disadvantages, including not being able to claim the full depreciation. This is because you only receive tax benefits if you use your property to make a profit. If the tax office comes to the conclusion that this does not apply to you, it will reduce the accepted depreciation proportionately, including the AfA.

If you move out of a property that you have used yourself for a long time, but are now renting it out, you can claim AfA from that point on. The applicable depreciation rate is the one that was valid on the original date of purchase or completion. Also, the useful life that is still valid is charged as if the property had been rented out from day one. Example: If you have lived in an old apartment built from 1925 onwards for ten years from the date of purchase and then rent it out, you can only claim depreciation against tax for a further 40 years. Incidentally, it is not possible to claim AfA retroactively for a property that has been owner-occupied for a long time.

Are you looking for the right residential property or do you have other questions about buying or investing in real estate? Feel free to contact us if you are interested - as experts in real estate as an investment or for owner-occupancy with specific investment opportunities, we at ACCENTRO are here to answer any questions you may have and help you find the property or properties that best suit your needs.