Depreciation on rental property

What depreciation is

A building wears out. German tax law recognises this: if you let a property, you spread the building’s acquisition cost over its useful life and deduct part of it from the rental income each year as an expense (§ 7 EStG). Depreciation is not money that leaves your account that year, but it lowers your tax. Owner-occupied homes get no depreciation, because there is no rental income.

The depreciation base

Purchase costs, i.e. transfer tax, notary, land registry and agent, are split between building and land in the same ratio as the price. Movable items such as a fitted kitchen are depreciated separately, a fitted kitchen over ten years. Depreciation starts in the month in which possession, benefits and burdens pass to you; in the first year it is pro rata.

Splitting land and building

How much of the price falls on the building is often the biggest lever and the most common dispute with the tax office. The usual approach splits by the values of land and building: the land value is the standard land value times the plot area, pro rata for flats, the building value comes from a valuation method.

The Federal Ministry of Finance provides a calculation aid that tax offices often use; the current version dates from March 2026. Courts are not bound by it. The Federal Fiscal Court ruled in 2020 that an expert valuation should be obtained in a dispute, and in 2025 also allowed the income-value method. Tax offices usually accept an economically plausible split in the purchase contract.

A new rule is planned: under the draft Annual Tax Act 2026 (§ 6f EStG), the split in the purchase contract would apply unless it is clearly unrealistic. If the tax office deviates using the calculation aid, that could only be rebutted with a report by a publicly appointed or certified expert after an inspection. It would apply to contracts signed after it comes into force; it has not been passed yet (as of October 2026).

Which rate applies

What counts is the year the building was completed, not the year you buy it. Buying a flat from 1995 in 2026 means 2 % a year.

A worked example

Lindenstraße 14 from the Wertavo demo portfolio: purchase price €268,000, purchase costs €21,400, building share 80 %, completed in 1998.

Over 50 years, depreciation adds up to the whole base. How it feeds into cash flow after tax is shown in Cash flow after debt service.

Declining balance for new builds

New residential buildings whose construction starts after 30 September 2023 and before 1 October 2029 can use declining-balance depreciation instead: 5 % of the remaining value each year (§ 7 (5a) EStG). This also applies to a purchase in the year of completion if the contract falls in that window. An example: a new build for €400,000 plus €40,000 purchase costs, building share 85 %, so a base of €374,000.

In total, no more is depreciated, only earlier: the tax saving moves forward. From year 15, linear depreciation over the remaining life is more than 5 % of the remaining value; switching is then allowed.

Special depreciation for new rentals

On top of that, § 7b EStG allows special depreciation of up to 5 % a year for new rental flats, in the year of purchase or completion and the three following years. Conditions: building application between 2023 and September 2029, Efficiency House 40 standard with the sustainable building quality seal (QNG), construction costs of no more than €5,200 per square metre, and the flat must be let for ten years. The base is capped at €4,000 per square metre.

Shorter useful life by expert report

If a building is demonstrably worn out sooner, it may be depreciated faster (§ 7 (4) sentence 2 EStG), an older house with 30 years of remaining life for example at 3.33 % a year. Any suitable report that deals with the specific building can serve as proof. Stricter requirements set by the Ministry of Finance in 2023 were withdrawn in December 2025 after rulings by the Federal Fiscal Court. The Bundesrat has proposed recognising shorter useful lives only if they already existed at completion; this has not been decided (as of October 2026).

Renovating after the purchase: the 15 % limit

If you spend more than 15 % of the building’s acquisition cost, excluding VAT, on repairs and modernisation in the first three years after the purchase, you cannot deduct these costs straight away. They become part of the acquisition cost and are depreciated with the building (§ 6 (1) no. 1a EStG). In the example, the limit is 15 % of €231,520, about €34,700.

Depreciation and selling

Depreciation reduces the acquisition cost. If you sell within ten years, the taxable gain rises by all the depreciation claimed; after that, the gain is tax-free. More in Selling property: the 10-year rule.