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Depreciating property: The smart way to save on taxes

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Possibilities of depreciation

According to §7 of the German Income Tax Act (Einkommensteuergesetz, EStG), as the owner of a rented property, you can depreciate it by claiming the acquisition costs and advertising costs for the property against tax. Owner-occupied real estate can also be depreciated, but only from the time it is rented out and for the remaining useful life.

In addition, there is an option for special depreciation for listed properties and newly built rental flats. However, the latter can only be depreciated if certain conditions are met, such as the creation of additional living space, the building application submitted after 31.08.2018 and before 01.01.2022, the rental for residential purposes for at least ten years, and the acquisition costs not exceeding 3,000 euros per square metre. The purchase of such a property must also be legally effective by the end of the year of completion.

Moreover, property owners can also depreciate a donated or inherited property since the heirs or donees are the legal successors and are thus required to continue the depreciation to the same extent.

These costs can be claimed for tax purposes

By depreciating a house or flat at the tax office, owners can offset the loss in value of the building. However, since a property cannot technically lose value, it is not possible to write off the entire costs for it. Therefore, the total costs must be divided up, as only the direct expenses related to the building can be claimed for tax purposes. This includes both acquisition and production costs. The acquisition costs include the purchase price, as well as ancillary purchase costs such as notary's fees, land transfer tax, and fees for the land registry, surveyor's fees, telephone and travel costs for all expenses related to the property. This also includes the broker's commission and any court costs in the case of compulsory auctions. Construction costs include expenses for architects, craftsmen, building permits, as well as earthworks, excavations, and installation of pipes. Additionally, travel costs to the construction site are also expenses that can be claimed.

Landlords have the opportunity to save taxes with property depreciation

Linear and declining balance depreciation

If the depreciation is calculated as a flat percentage, it is called straight-line depreciation. This means that the amount of depreciation remains constant throughout the entire useful life of the property. On the other hand, declining-balance depreciation works differently, as the depreciation rate is higher in the first few years and gradually decreases over the useful life. This reflects the fact that the loss in value of an asset is significantly higher in the beginning and should create an incentive for investors to use real estate as a financial investment. However, this form of depreciation is now only legal for properties acquired before January 1, 2006, where the depreciation rate was four percent for the first ten years, 2.5 percent for the following eight years, and 1.25 percent for the remaining 32 years.

Written by:

Stefanie Aust, Gastautorin

Stefanie loves to put complex topics from the real estate world into understandable and inspiring words. Whether it's about the right financing, choosing the right type of flat, or a successful property search: Stefanie is happy to inform you.

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