Literally translated, AfA stands for “depreciation due to wear and tear” (“Absetzung für Abnutzung”). It is a term used in German tax law. The purpose of AfA is to spread the construction or acquisition costs of a property over its useful life.
Property owners who rent out their property may deduct a proportion of the acquisition and construction costs as income-related expenses for tax purposes. This provision does not apply to owners of owner-occupied properties.
Anyone who constructs a new building or purchases an apartment as an investment can currently apply straight-line depreciation at a rate of two percent to the construction costs. In principle, this is possible over a period of 50 years.
Depreciation Rates and Maximum Useful Life Vary
Straight-line depreciation, meaning an equal annual depreciation rate of two percent, also applies to residential properties constructed from 1925 onwards. Different rules apply to buildings constructed before 1925. In this case, the depreciation rate is 2.5 percent.
However, the tax authorities always deduct the proportion of the purchase price attributable to the land from the construction or acquisition costs. Unlike the buildings constructed on them, land is not subject to wear and tear.
A Special AfA Allowance May Soon Be Available
A potentially lucrative financial opportunity could arise from the German Federal Government’s planned special AfA allowance, which was approved by the Federal Cabinet in 2018.[1] It applies to projects in the affordable housing segment and includes new-build developments, the addition of extra storeys to existing buildings, and the conversion of commercial space into new rental apartments.
The special AfA allowance is intended to amount to an additional five percent on top of the standard straight-line depreciation and is primarily designed to encourage private investors to build affordable housing.
It applies only where construction costs are below EUR 3,000 per square metre and the apartments are rented out at an affordable price for at least ten years. According to the plans available at the time, a maximum of EUR 2,000 per square metre could be deducted for tax purposes. In addition, the tax benefit resulting from the special depreciation allowance may not exceed EUR 200,000.
The special incentive is expected to be available for a limited period and is intended to apply to building applications submitted between 31 August 2018 and 31 December 2021.
The following example illustrates how the special AfA allowance could provide financial benefits in the case of a loft conversion. Assuming that the owner’s annual taxable income amounts to EUR 70,000 and the annual rental income amounts to EUR 8,400, EUR 3,000 per year could be deducted through straight-line depreciation at a rate of two percent. A further EUR 7,500 could be deducted through the special AfA allowance at a rate of five percent.
After deducting the interest payable, the total tax relief would reduce the taxable income to EUR 64,900.[2]
[1] Source: www.immobilien-zeitung.de
[2] Source: ratgeber.immowelt.de
