Depreciation of Listed Buildings: The Risk for Investors
This guide refers to German law and the German tax system. It is a translation of our German original and does not replace individual tax or legal advice.
In 2024, property as an investment is still one of the most attractive options for retirement planning and building wealth. Despite higher interest rates (as of Q1 2024), investors use properties in attractive locations to save tax: listed properties (Denkmalimmobilien) enjoy the same reputation. These are buildings under heritage protection that German law favours when it comes to depreciation. What intermediaries and investment advisers often fail to mention, however, is the risk that comes with the purchase. In this article, we explain how depreciation for listed buildings (Denkmal-AfA, from AfA — Absetzung für Abnutzung, depreciation for wear and tear) works and which unforeseen challenges await investors.
Example calculation for a let listed property (building share €85,000 plus €280,000 renovation costs, income from employment €145,000 per year):
- Years 1–8: plus rental income €18,000 – less building depreciation (2.5% of €85,000) €2,125 – less listed-building depreciation (9% of €280,000) €25,200 – less interest approx. €5,000 = taxable income €127,925 per year
- Years 9–12: plus rental income €18,000 – less building depreciation (2.5% of €85,000) €2,125 – less listed-building depreciation (7% of €280,000) €19,950 – less interest approx. €5,000 = taxable income €130,675 per year
Neo Capital supports high-earning employees and entrepreneurs in investing their assets in a tax-optimised way. We rely on an individual structuring of your portfolio and, in cooperation with your tax adviser, design optimal provision and protection for your assets. In addition, we convert your tax liabilities into private wealth through various investment options, which leads to greater and more efficient wealth building.
Heritage protection and depreciation for listed buildings
For depreciation under heritage protection, there are requirements that a property must meet. Historic buildings often fall under heritage protection: precise information can be obtained from the heritage protection authority (Denkmalschutzbehörde) and the responsible building authority. Once a property has been declared a listed building, the owners enjoy a variety of advantages. Starting with the full depreciation of the acquisition and renovation costs, shorter periods also apply to depreciation. If a property is let, 100% of the costs can be depreciated over 12 years. During this period, 9% is depreciated in each of the first eight years and 7% in each of the following four years. At first glance, the tax burden can thus be drastically reduced, which investment advisers in particular use as an argument for buying such properties. However, the preferential treatment of listed properties comes with a multitude of risks. Before we turn to the tax implications, we would like to inform you about the general challenges of maintaining such a property. Starting with the increased risk of vacancy, rental income may fail to materialise. Depending on the region, listed properties are a less attractive choice for tenants and landlords compared with new-build and recent properties. This is particularly evident in structurally weak regions, which are already characterised by low rental yields. The incentives of listed-building depreciation are thus quickly put into perspective by a high vacancy risk and low rental yield.
Depreciation subject to the tax office's decision: risks after purchase
Anyone who has decided on a listed property for letting despite the vacancy risk is exposed to a variety of tax hurdles. In principle, the tax office (Finanzamt) decides on the listed-building depreciation of the property. In the event of an unfavourable decision, the developers' often tight calculations can thus be thrown out, leading to even lower returns and a lack of tax savings. With just one notice, the once so attractive property becomes subject to conventional depreciation or a reduced assessment of the renovation share over the fixed useful life. Anyone who previously wanted to depreciate nine per cent per year through owner-occupation or use the favourable listed-building depreciation while letting now faces considerably less attractive conditions. Having established the risk of a third-party decision by the tax office, it is worth looking at the private level as an investor. Here, a high monthly shortfall can arise over the depreciation period as soon as taxable income decreases over the next 12 years. In this case, the already increased additional payments rise further, which are already considerably more extensive than with classic real estate investments. Compared with similar real estate investments without renovations and listed-building depreciation, listed properties often perform significantly worse for wealth building than new-build properties or conventional properties.
Neo Capital: long-term wealth building without risky listed properties
As you can see, demographic, tax and calculation risks argue for a considerably more sober view of listed properties. Listed-building depreciation is set as an incentive for renovations and used by investment advisers to promote sales. Reality shows, however, that taxed capital or tax savings achieved can be invested far more lucratively. Anyone who spreads their risk and relies on properties with market-standard value development can avoid the risk of loss of value in already structurally weak regions. The alternative to listed-building depreciation is therefore properties whose location and substance argue for long-term development of market price and rent. As independent financial experts, we advise our clients on the sustainable investment of private assets. We analyse the pros and cons of all options on the market and make data-driven decisions. For optimal depreciation and the use of genuinely attractive tax advantages, we draw on our network of tax advisers and in-house real estate experts. In cooperation with your tax adviser, we thus develop a long-term strategy that leads to sustainable wealth building.
Frequently asked questions
Which expenses can be claimed for tax purposes on listed properties?
In addition to the usual expenses, for let properties under heritage protection the costs of renovations can also be deducted over a considerably shorter period. The tax office ultimately decides on the type and duration of listed-building depreciation — even contrary to the heritage authority's assessment — which leaves all listed properties exposed to a fundamental risk.
What are the disadvantages of depreciation for listed buildings?
Listed-building depreciation was developed by the German legislator as an incentive to acquire existing properties under heritage protection. The costs of the property and the costs of all renovations are claimed for tax purposes over a period of 12 years. This increased depreciation can significantly reduce the tax burden on taxable annual income, but it comes with numerous conditions and a final decision by the tax office on the form of depreciation.
What alternatives are there to listed properties?
The often high-risk investments in a listed property contrast with classic new builds and recent existing properties in sought-after locations. Measured against the current development of structurally weak regions, these investments are often more attractive for a long-term investment.