Tax optimisation of the letting of residential properties held as part of private assets or indirectly via asset-managing property pools presents new pitfalls, both for new-build housing and for existing properties, when seeking to take advantage of faster depreciation schedules.
General useful life of private rental properties
For tax purposes, let properties are classified as part of a private individual’s personal assets if they are held directly by private individuals or indirectly via asset-managing property pools. Asset-managing property pools include, amongst others, civil law partnerships (eGbR), limited partnerships (Kommanditgesellschaften) and asset-managing GmbH & Co. KGs. In particular, the latter legal form is frequently encountered as a property holding company for single-family offices. From an income tax perspective, this form of asset management gives rise to income from letting and leasing in accordance with Section 21 of the German Income Tax Act (EStG) (Annex V of the German income tax return).
The acquisition costs of a residential property let out, including all incidental acquisition costs (notary fees, estate agent’s fees, land transfer tax), may be deducted from rental income at a rate of 3 per cent per annum to reduce taxable profit, provided the residential property was completed on or after 2023 (residential properties completed by the end of 2022 are to be depreciated on a straight-line basis at 2 per cent per annum, as before). Conversely, this results in a standardised useful life of 33 years for private residential properties for tax purposes within the meaning of Section 7(4)(2)(a) of the Income Tax Act (EStG).
Ways to Shorten Depreciation Periods for Tax Purposes
For both new residential construction and the purchase of existing properties, it is possible, for income tax purposes, to claim an annual depreciation rate greater than the straight-line rate of 3% to reduce taxable income.
Special Depreciation Allowances for New Residential Buildings
In the area of new residential construction, so-called special depreciation allowances for newly constructed rental apartments—at a rate of 5% per annum for a period of four calendar years—may be claimed. The following requirements must be met:
- Creation of new rental housing
- Building Permits Effective January 1, 2023 (Please Note: For Renewed Building Permit Applications)
- Long-term lease (at least 1 year or indefinite)
- Cost cap of 5,200 euros per square meter of new rental housing space
- Sustainability standard: Efficiency House 40 NH (for an increased assessment basis)
If these criteria are met, 5% of the adjusted tax base (which differs from the actual acquisition cost) of 4,000 euros per square meter, based on the rental living space, may be claimed as a tax deduction for four consecutive years, in addition to the straight-line depreciation of 3%. If the property does not qualify as an “Effizienzhaus 40 NH,” the special depreciation is calculated solely on an adjusted tax base of 2,000 euros and thus loses much of its tax benefit (detailed information on this is contained in the new letter from the Federal Ministry of Finance dated May 21, 2025, Ref. No. IV C 3 - S 2197/00009/ 011/024, published in the Federal Tax Gazette 2025 I, p. 1419 ff.).
In particular, the first requirement—the creation of new residential space—has taken on new significance following the first-instance ruling by the Cologne Fiscal Court (Cologne Fiscal Court ruling of September 12, 2024, Case No. 1 K 2206/21), as the court clarified in this decision that the special depreciation allowance applies exclusively to new and additional residential space—that is, space that did not previously exist. Replacement new construction is not considered to fall under this category, even if the property is technically and energetically a completely new residential building. The demolition of old residential properties—even if they were no longer habitable—and the construction of new residential properties of the same size therefore do not meet the necessary criteria for qualifying as new residential construction.
Shorter useful lives for existing properties based on appraisals
If you purchase a used existing property and rent it out for residential purposes, you are required to report the straight-line useful life of 33 years and the depreciation rate of 3% as part of your rental income. This applies regardless of the property’s age or condition at the time of purchase. Accordingly, physical wear and tear is not taken into account for tax purposes.
However, the German Income Tax Act provides for an exception that is rarely utilized in practice, under which purchasers of existing real estate may apply a significantly shorter useful life than the official 33 years. Under Section 7(4), sentence 2, of the Income Tax Act (EStG), a shorter useful life than the officially standardized useful life may be recognized for tax purposes in the context of the private rental of residential real estate, provided that an appraisal by a publicly appointed and sworn expert for the valuation of developed and undeveloped real estate appropriately demonstrates and reasonably classifies a shorter remaining useful life based on the condition of the property. Pursuant to § 11c(1)(a) of the draft EStDV, the appraisal must, taking into account the individual circumstances of the property, provide information on the relevant technical, economic, and legal factors that influence the useful life in each specific case. A new requirement in this context will be the mandatory on-site inspection by the appraiser; without this, the appraisal will no longer be recognized by the tax authorities. The on-site inspection should therefore be documented in detail in the appraisal report.
Practical Tip
Real estate investors should critically evaluate residential properties advertised as offering special depreciation allowances, consulting a tax advisor to assess the actual feasibility of claiming such allowances for new residential construction; ideally, they should obtain a contractual guarantee from the selling construction companies confirming the applicability of these special depreciation allowances. In this way, real estate investors and family offices can, in the worst-case scenario, claim compensation from their contractual partners for any lost tax benefits. Given the shorter useful life of existing properties, it is imperative that recognized appraisers be commissioned to conduct an on-site inspection before preparing their reports to ensure the tax recognition of value and condition appraisals.
