Depreciation on Buildings: 2, 2.5, or 3 Percent for Rental Properties

What is depreciated when it comes to real estate?

The building is depreciated, not the land. Depreciation, or AfA for short, spreads the acquisition or construction costs over the years of use. Each year, a fixed percentage is recognized as an expense in the financial statements (Section 7(4) of the German Income Tax Act (EStG)). Land does not depreciate and is therefore not included in the AfA calculation.

Depreciation becomes relevant for real estate that generates income, such as rental property. If you live in your own apartment, you do not have any income from it against which depreciation can be applied.

How do you allocate the purchase price between the building and the land?

Only the building portion is depreciated, so the total purchase price must be allocated. In addition to the purchase price, the acquisition costs also include incidental expenses, such as notary fees, land registry fees, and real estate transfer tax. These are allocated in the same proportion as the purchase price.

A specific order applies to the allocation. The allocation specified in the purchase agreement takes precedence. It serves as the basis for depreciation calculations provided that it was not merely a sham, does not constitute an abuse of legal form, and reflects the actual value ratios—that is, it is economically reasonable. If no such allocation exists or is invalid, the allocation is based on the ratio of the market values of the land and the building. To assist with this, the Federal Ministry of Finance provides a guide for allocating the purchase price.

The residual value method is not permitted: purchase price minus land value, with the remainder considered the building. This is how buyers often calculate it, but this is precisely how the allocation must not be made.

What depreciation rates apply to buildings?

The rate depends on the year the building was completed (Section 7(4), first sentence, No. 2 of the Income Tax Act (EStG)). Buildings completed after December 31, 2022, are depreciated at a rate of 3% per year; buildings constructed between 1925 and 2022 are depreciated at a rate of 2%; and buildings completed before January 1, 1925, are depreciated at a rate of 2.5%. For buildings in business assets that are not used for residential purposes and for which the building permit application was filed after March 31, 1985, the 3% rate also applies (No. 1). These rates apply in each case, provided the building meets the requirements. A mixed-use building—such as one with a store on the ground floor and apartments above—is therefore divided and not classified uniformly.

When does a shorter useful life apply?

If the actual useful life of a building is less than 33, 50, or 40 years, depreciation may be calculated based on this shorter period (Section 7(4) of the Income Tax Act (EStG)). The threshold is 33 years for the 3% cases, 50 years for buildings completed between 1925 and 2022, and 40 years for buildings completed before 1925. With an actual useful life of 25 years, this amounts to 4% per year. The administration and case law govern how the shorter useful life is to be substantiated; this article does not specify any rules in this regard.

What is the declining-balance depreciation method, and what is the special depreciation method for new buildings?

For new residential buildings, there is an option. Instead of the 3% straight-line depreciation, a 5% declining-balance depreciation based on the respective residual value may be chosen (Section 7(5a) of the German Income Tax Act (EStG)). The building must be used for residential purposes, be located in the EU or the EEA, and have been constructed by the taxpayer or acquired by the end of the year of completion. Construction must have begun after September 30, 2023, and before October 1, 2029; in the case of a purchase, the purchase agreement must have been effectively concluded during this period. The start of construction is deemed to be the date specified in the notice of commencement of construction, which must be submitted in accordance with state law. If your state does not require such a notice, you must declare that you have voluntarily notified the building authority of the start of construction.

In the first year, the declining-balance depreciation is reduced on a monthly basis: One-twelfth is deducted for each full month prior to the month of acquisition or construction (Section 7(1), Sentence 4, EStG). This option also comes at a cost: As long as you use the declining-balance method, deductions for extraordinary technical or economic wear and tear are not permitted. It is possible to switch to the straight-line depreciation method; in that case, it is calculated based on the residual value in accordance with paragraph 4.

Over five years, you'll depreciate €22,865.72 more using the declining balance method than the straight-line method: €67,865.72 versus €45,000.00.

In addition, newly constructed rental apartments are eligible for special depreciation under Section 7b of the Income Tax Act (EStG). In addition to the property being rented out, eligibility depends on limits on construction costs, an energy efficiency standard, and the date the building permit application was filed. The details are set forth in the regulation and the Federal Ministry of Finance (BMF) letter dated May 21, 2025.

What counts is the date the building permit application or notice of construction was filed, not the start of construction. Anyone who filed the building permit application before the eligible period will not be eligible for the special depreciation even if construction does not begin until after that period.

When does depreciation begin?

Depreciation begins as soon as the building is acquired or completed. It is considered acquired upon the transfer of economic control, not on the date of the purchase agreement.

Under the straight-line depreciation method, the amount for the first year is prorated for the period during which the building was not yet used to generate income after its acquisition. This applies, for example, to a purchased apartment that is not rented out until after renovations have been completed.

Example: You take ownership of the apartment in July, and it is rented out starting in September. The depreciation for the first year is reduced for July and August.

Under the declining-balance depreciation method, however, the depreciation amount is reduced on a monthly basis in the first year (Section 7(1), sentence 4, of the Income Tax Act (EStG)).