Building Wealth with Real Estate – Opportunities, Strategies and the Current Framework
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.
Real estate has always been one of the most stable and secure forms of building wealth. It offers not only long-term potential for growth in value, but also tax advantages that investors can use in many countries, including Germany. Particularly in times of economic uncertainty and rising inflation, real estate is regarded as a form of investment that retains its value. But how exactly do property investments work in wealth building, and which current legal frameworks – such as the special depreciation under Section 7b of the German Income Tax Act (EStG) (as of September 2024) – need to be observed?
Neo Capital is your partner for data-driven and holistic retirement provision for high-earning employees and entrepreneurs. In this article, we give you a detailed overview of the opportunities and challenges of real estate as a building block of wealth and shed light on current legal developments that investors in Germany should be aware of. This leaves you optimally prepared for your first or next steps in building wealth with real estate.
The fundamental advantage of property investments in wealth building
Real estate offers a number of advantages over other forms of investment such as equities, bonds or precious metals. A key advantage is the possibility of debt financing, which creates a leverage effect: even with a small share of equity, investors can acquire large assets. This means that investors can significantly increase their returns, as the property is financed not only by the equity share but also through the use of borrowed capital.
A further important point is long-term growth in value. Historically, real estate – particularly in sought-after locations – has steadily increased in value. This gives investors the opportunity to grow their wealth over the years, regardless of short-term market movements. In addition, letting property provides a regular source of income that flows passively and does not depend on your own labour. This can help reduce financial dependence on the labour market while generating a stable income. Real estate also offers protection against inflation. While the value of currencies falls due to inflation, real estate retains its real value or even increases in it. This is a decisive advantage, especially in times of low interest rates and uncertainty on the financial markets.
Special depreciation under Section 7b EStG – an overview of the legal framework
To promote residential construction in Germany, the state offers investors tax incentives in the form of special depreciation (Sonderabschreibungen). Under Section 7b of the German Income Tax Act (Einkommensteuergesetz, EStG), investors who invest in the construction of rental flats can use an additional tax advantage. This special depreciation allows investors to write off their investments more quickly and thus reduce their tax burden in the first years after the construction or acquisition of properties.
The current rules provide that investors can claim special depreciation of up to 5% per year over four years, provided they invest in new residential buildings or the conversion of existing buildings. In total, 20% of the investment costs can therefore be written off in the first four years, which represents considerable tax relief.
To benefit from the special depreciation, certain requirements must be met. The property must have been built or acquired after 31 August 2021 and must demonstrably be used for residential purposes. In addition, the construction costs must not exceed a certain maximum amount. This rule offers interesting opportunities to increase returns, particularly for investors who invest in new builds or extensive renovation projects.
Long-term strategies: buy, hold, sell – when is the right time?
For many property investors, the question arises as to when the right time is to buy, hold or sell a property. A common strategy is to buy properties during a phase of low interest rates and hold them for the long term in order to benefit from the growth in value and the rental income. This so-called buy-and-hold strategy aims to build and secure assets over the long term.
Holding properties over a long period has the advantage that investors not only benefit from the growth in value, but can also use tax advantages. For example, after a holding period of ten years, the speculation tax (Spekulationssteuer) on the sale profit no longer applies. In addition, rental income can be used continuously to repay the mortgage, which increases the value of the property relative to the outstanding debt.
The timing of a sale becomes decisive when the property has reached its maximum value or the money is to be reinvested elsewhere. A planned sale after the speculation period has expired can be advantageous from a tax perspective. Alternatively, investors can also benefit from market changes by buying in up-and-coming areas and later selling at a profit. We advise you holistically on the right time to buy and sell, with a view to your current situation.
Neo Capital: data-driven property investments for optimal wealth building
As a strategic partner in property investment, Neo Capital offers a modern, data-driven approach. Using technologies and data models, our team at Neo Capital analyses the market and identifies particularly high-yielding investment opportunities. This enables investors to make informed decisions and to acquire properties with high potential for growth in value in a targeted way.
At Neo Capital, we support you not only in analysing and selecting properties, but also in planning a long-term wealth strategy tailored individually to the investor's financial goals. In the area of off-market properties in particular, Neo Capital gives its clients access to exclusive investment opportunities that are not available on the open market. These off-market deals often offer higher returns, as they face less competition and are located in up-and-coming markets. Contact us for a no-obligation consultation – we look forward to discussing your wealth building and wealth protection with you.
Neo Capital: advice and making targeted use of tax advantages
Property investors have a wide range of ways to save tax and maximise their returns. Whether through depreciation, the use of income-related expenses or the tax exemption on sale after 10 years – anyone who makes optimal use of the tax rules can make their investments significantly more profitable.
It is important to pursue both short- and long-term strategies and always to factor the tax aspect into investment decisions. For more complex structures, such as using a property GmbH or combining depreciation and tax advantages, it is worth seeking professional support at an early stage. We advise you on your long-term structuring from the very first second. Ultimately, the German property market offers not only secure investment opportunities that retain their value, but also attractive tax advantages that can be used in a targeted way. In a personal consultation based on your individual situation, we show you how you can use these advantages for yourself and those close to you.