Income Tax - Introduction of a declining-balance depreciation method for new residential construction under the Growth Opportunities Act
“Good things take time”—at least when it comes to the tax implications of privately renting out residential real estate, this saying should prove true in light of the Growth Opportunities Act that has been passed (the political compromise was approved by the German Bundesrat on March 22, 2024). For private residential properties that are rented out, 3% (previously 2% for decades) of the depreciable acquisition costs of the building or share of the building has been deductible annually from rental income as part of the tax surplus calculation since January 1, 2023. With the Growth Opportunities Act, the allowable depreciation will increase again in the short term due to the temporary reintroduction of a declining-balance depreciation method for residential real estate.
The new declining-balance depreciation (depreciation allowance / “AfA”) amounts to 5% annually of the remaining book value of the building’s acquisition cost and is granted under the following conditions:
- Applicable only to new construction or the purchase of new homes
- Construction to begin between October 1, 2023, and September 30, 2029 (six years)
- Using the start of construction as the cutoff criterion within the eligibility period (previously, this was typically the date of the building permit application) or
- Notarized purchase agreement for the new construction between October 1, 2023, and September 30, 2029, and acquisition of the property in the year of completion
As soon as the straight-line depreciation method at 3% per year results in a higher and more tax-advantageous depreciation amount, a switch to the straight-line depreciation method is permitted.
This newly introduced declining-balance depreciation method—like the straight-line depreciation method—can be combined with the so-called special depreciation allowance for new rental housing construction. Since 2019, this special depreciation has rewarded the construction of energy-efficient new buildings (KfW 40 and QNG sustainability seal) that are leased to third parties for residential use for at least 10 years. Until now, the use of this special depreciation has been hindered by its eligibility requirements, particularly the maximum acquisition cost limit—previously set at 4,800 euros per square meter of built-up floor area—which has been raised to 5,200 euros. Once this hurdle is cleared, the special depreciation can be claimed for four years at a rate of 5% annually, in addition to straight-line or, as is now also permitted, declining-balance depreciation. However, this may only be applied to a maximum of 4,000 euros per square meter of the building’s acquisition and construction costs (previously 2,500 euros).
For example, if you purchase a newly built apartment with 100 square meters of usable living space for 500,000 euros, with the purchase price allocated 80/20 in favor of the building portion, the acquisition cost for the building portion—400,000 euros (4,000 euros per square meter) can be fully utilized for the special depreciation.
Depending on the specific value and area ratios of the underlying real estate property, up to approximately 50% of the building’s acquisition costs may be deducted for income tax purposes within the 10-year tax speculation period for private real estate. In the recent past, such tax benefits were granted exclusively to historically protected properties.
It remains to be seen whether the new depreciation structure can, on the whole, help revive Germany’s severely depressed construction industry. Certainly, further efforts to reduce bureaucracy and speed up approval processes at the state level would also be necessary.
