Depreciation of new-build property: how buying a flat becomes a tax advantage
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.
Housing remains in short supply in Germany in 2023, which ensures continued strong demand, especially in popular cities. Despite the sometimes dramatic decline in the construction industry in recent months, investments in rental flats are more sought-after than ever, particularly among private investors. The reasons for this quickly become clear: tax advantages, in particular from the Annual Tax Act 2022 (Jahressteuergesetz 2022), as well as sharply increased rents and falling purchase prices. In this article, we explain which aspects should be considered when investing in property and how the depreciation of new builds in 2023 affects your personal tax. We also explain how new builds compare with existing properties in terms of tax on purchase and upkeep, and which opportunities arise from the draft legislation on declining-balance depreciation for property from September 2023.
Neo Capital supports wealthy employees and self-employed people in converting their personal tax burden into private wealth. To do this, we use tax-advantaged investment opportunities such as property as an investment. Together with our network of tax advisers and financial investment experts, we advise our clients comprehensively and on a data-driven basis. Book a consultation on the tax optimisation of your individual income and wealth situation and find out which tax advantages you can still use this year. You can also read our portfolio manager's current market assessment of the Berlin property market here.
New-build property in prime locations: faster depreciation from 2023
Under German tax law, property can be taken into account through two types of depreciation. The most common is straight-line depreciation for wear and tear (AfA, Absetzung für Abnutzung) at 2% over 50 years. This relatively low depreciation applies to properties built after 1924. Because the purchase costs, less the land, are depreciated at a low rate, only relatively small tax advantages can be achieved as a result. This works somewhat better with listed buildings (Denkmalimmobilien), which are considerably more privileged by the legislator. Here, modernisation and renovation costs can be depreciated at 9% or 7% p.a. over 12 years. We have summarised more detailed information in our article "Saving tax with real estate". Since the conventional 2% AfA rate and the strict requirements for listed buildings can make these unattractive for many investors from a tax perspective, attention quickly turns to new builds. The Annual Tax Act 2022 stipulated that new builds can be depreciated at 3% p.a. and are eligible for special depreciation. The latter comprises up to 5% in the first four years from the year of completion. The law is intended to promote housing construction and, by comparison, represents an attractive form of depreciation. Rental flats can thus be depreciated in around 33 years instead of 50 years. These opportunities are supplemented by the draft legislation on declining-balance depreciation, which we present below. If the purchase and the acquisition of economic ownership fall within the same calendar year, the legislator holds out the prospect of declining-balance depreciation at 6% p.a. This follows from the current draft legislation and allows investors to have the tax office (Finanzamt) share even more in their own investment through tax cashbacks. This time-limited measure is intended to bring fresh momentum to the construction industry and applies to buildings constructed between 30 September 2023 and 1 October 2029. We also advise you on choosing the right depreciation method so that you can quickly obtain capital for further investments through refunds from the tax office.
Tax advantages of new residential construction
As an investor, you should not neglect the individual tax saving that the property brings. With depreciation of 3% p.a. on new builds, more capital is released over a shorter period, which can be used for further investments. By using the special depreciation in particular, you can expand your own property portfolio in large steps, provided the tax advantages are used in good time. Depreciation for wear and tear (AfA) lowers your individual tax burden and offers numerous options for tax structuring that open up when rental flats are let to third parties. Especially for well-paid employees and self-employed people, this type of investment is incomparably efficient when it comes to building wealth and reducing their own taxes. In addition to the classic depreciation options, costs relating to the upkeep of the property can be claimed for tax purposes for all rental flats. Estate agents, management and ancillary costs are also significant expenses that reduce tax at a personal level and ensure annual tax cashbacks. We have explained more on this topic in this article, using an example of selling property within the family with renewed and higher depreciation.
Neo Capital: property investments through vetted developers
Apart from PV direct investments, no asset class is as tax-advantaged and as flexible to structure as the let property. The Annual Tax Act 2022 created further incentives for well-paid employees or self-employed people with equity to take the tax helm into their own hands. For this reason, this year too we are advising numerous clients on entering the market or expanding their portfolio in order to convert tax burden into private wealth. With the wider choice of depreciation options and special depreciation, first-class returns can be achieved, especially in prime locations in large cities. We structure the tax reduction around secure new builds from vetted developers in order to create optimal conditions at all times for new clients entering the property market. As independent advisers, we work every day on the tax structuring and provision of numerous employees, self-employed people and entrepreneurs. Together we carry out a profitability analysis and data-driven return calculations. With a view to your individual life and income situation, we make clear recommendations and point the financial way towards a tax-optimised future. Draw on rare properties with first-class returns with our experts and experience modern tax structuring with annual cashbacks. We advise you on tax optimisation, property as an investment, special depreciation and property selection.
Frequently asked questions
What does AfA mean?
AfA is the abbreviation for "Absetzung für Abnutzung" (depreciation for wear and tear), also simply called depreciation. AfA means that each year a certain percentage of the investment costs for a larger purchase (in this case property) that serves to generate income can be deducted from taxable income. Depending on the tax rate, this can amount to an effective tax reduction of 45% of the depreciation amount. In practice, this often means higher four- to five-figure tax advantages per year.
How long does the special depreciation for new-build flats under Section 7b ESt apply?
Within the first four years, investors have the option of claiming 5% or 6% p.a. for tax purposes in the form of special depreciation. Special rules apply here, which we will be happy to present to you in our consultation. After four years, the preferential depreciation for new builds of 3% p.a. applies.
What depreciation applies to flats?
Let properties can be depreciated over a period of 50 years at 2% p.a. each year. On the basis of the Annual Tax Act 2022, a new-build flat can be depreciated at 3% p.a., which makes the purchase particularly attractive for well-paid employees and self-employed people. This is mainly due to the reduction of taxable income at the marginal tax rate.