Literally, AfA stands for “depreciation deduction.” It is a term used in tax law. The purpose of AfA is to spread the construction or acquisition costs of a property over its useful life.
Property owners have the option, in the case of rental properties, to deduct a proportionate share of the acquisition and construction costs as business expenses for tax purposes. Owners of owner-occupied properties are exempt from this rule.
Anyone who constructs a new building or purchases an apartment as an investor can currently apply straight-line depreciation at a rate of two percent of the construction costs. In principle, this is possible for 50 years.
The depreciation rate and maximum useful life vary
The straight-line, or uniform, depreciation rate of 2 percent per year also applies to residential properties built on or after 1925. However, a different rule applies to buildings constructed before 1925. In this case, the depreciation rate is 2.5 percent. However, the tax office always deducts a proportionate purchase price for the land from the construction or acquisition costs. Unlike the buildings erected on them, plots of land are not subject to wear and tear.
A special depreciation allowance will also be available soon
A financially lucrative opportunity could arise from the federal government’s planned special depreciation allowance, which was approved by the Federal Cabinet in 2018.[1] It applies to projects in the affordable housing sector and includes new construction, rooftop additions, and the conversion of commercial space into new rental apartments. The special depreciation allowance is set to amount to five percent in addition to the regular straight-line depreciation and is intended, in particular, to encourage private investors to build affordable housing.
It applies only if the construction costs are below 3,000 euros per square meter and the apartments are rented at an affordable price for at least ten years. Under current plans, a maximum of 2,000 euros per square meter is then tax-deductible. Furthermore, the tax benefit resulting from the special depreciation may not exceed 200,000 euros. The special incentive is expected to be temporary and will apply to building permit applications submitted between August 31, 2018, and December 31, 2021.
Here is an example of how the special depreciation could pay off financially in the case of an attic conversion. If the owner’s taxable annual income is initially 70,000 euros and the rental income is 8,400 euros, then 3,000 euros could be deducted annually through the straight-line depreciation at two percent, and an additional 7,500 euros through the special depreciation at five percent. After deducting interest payable, the total reduction in taxable income would amount to 64,900 euros.[2]
[1] (Source: www.immobilien-zeitung.de)
[2] (Source: ratgeber.immowelt.de)
