Anyone interested in purchasing real estate would be wise to familiarize themselves with the tax and legal framework well in advance. Real estate buyers can expect not only many obligations but also several benefits that help them recoup their investment or construction costs more quickly and turn them into long-term returns.
Far too little construction is taking place. And the need for housing is enormous. This is one of the reasons why the federal government introduced and passed the Growth Opportunities Act in March 2024. One key change in the law is the introduction of declining-balance depreciation, a special “depreciation allowance” (AfA). This policy measure is intended not only to promote new construction but also to encourage investors to invest in new construction projects at an early stage, thereby increasing the supply of rental housing.
The new regulation is intended to serve as a significant incentive for new residential construction or for the purchase of newly built residential properties and can be applied to all newly built properties used as living space for which construction began or acquisition took place between October 1, 2023, and September 30, 2029.
Linear vs. Declining
Depreciation is an accounting method used to record the loss in value (also known as “wear and tear”) of an asset, such as real estate, and to claim it on a tax return. Depreciation reduces the tax burden because it offsets the assumed loss in value against potential gains.
With straight-line depreciation, a constant, fixed percentage—namely three percent of the acquisition or construction costs—is deducted each year over the entire useful life of a building. With declining-balance depreciation, the depreciable residual value of a property is deducted in stages. In the first year, the entire investment amount can be depreciated. This percentage then decreases annually and is calculated based on the residual value. Thus, the potential depreciation is particularly high in the first few years after acquisition.
Declining-balance depreciation complements straight-line depreciation and, according to experts, is better suited to reflecting the actual annual depreciation of a property. With the newly introduced declining-balance depreciation, buyers and investors can deduct five percent of the investment costs or the residual value each year, starting as early as the first year of acquisition.
This is stated in the German federal government’s explanatory notes on the Growth Opportunities Act:
“Technology installed in new buildings is often rendered obsolete by new developments within a few years. As a result, buildings lose value more quickly at the beginning. Declining-balance depreciation promotes faster refinancing of investments made.”
Part of the income-related expenses
Buildings that are rented out or used for commercial purposes can simply be listed as employment-related expenses on your income tax return and depreciated. This reduces your tax liability, resulting in immediate tax relief.
For owner-occupiers, the depreciation deduction (AfA) is not applicable. It is intended only for newly constructed properties that are then rented out for residential purposes. However, the declining-balance depreciation method can be applied not only to new construction or entirely new acquisitions. Even if you decide, for example, to convert an attic into a rental residential property, you can claim the depreciation. This promotes not only new construction but also the repurposing of existing properties and the creation of new living space.
Combining and Switching Depreciation Methods
According to the law, switching from declining-balance depreciation to straight-line depreciation is possible and strategically sound. After a certain period of time, straight-line depreciation may be more financially attractive, as the annual depreciation amount is then higher than under the declining-balance method. Additionally, you have the option to combine different depreciation methods. For example, you can combine the declining-balance depreciation method with the special depreciation allowance for new rental housing construction or the special depreciation allowance for climate-friendly new buildings.
A tax advisor or financial expert can provide you with personalized advice and help you find the best strategy for your situation. This way, your investment in a modern, future-proof condominium will quickly translate into a return on investment.
