Rental income tax in Germany: costs and depreciation

What counts as taxable letting income

Section 21(1) covers income from letting buildings, parts of buildings, land and rights such as a ground lease (Erbbaurecht). The tax is on the surplus: income minus Werbungskosten (income-related expenses) under section 9.

Section 21(2) addresses rent below the market level. If rent for a home is less than 50% of the local market rent, the use is split into a paid and an unpaid part, and costs can be deducted only for the paid part. If rent for a long-term letting is at least 66% of the local rent, the letting counts as fully paid. Between 50% and 66% the law does not give a rule in that section.

What you can deduct

Section 9(1) lists the main items:

• Interest on loans, to the extent they are economically linked to the letting (number 1).
• Property tax, other public charges and insurance relating to the building (number 2).
• Depreciation (Absetzung für Abnutzung, AfA), special depreciation under section 7b and increased allowances (number 7).

Running repairs, management costs and other expenses linked to the rent are covered by the general definition of Werbungskosten in section 9(1): expenses “to acquire, secure and maintain the income”. The purchase price of the building is recovered through depreciation, not as an immediate expense.

Depreciation: three annual rates

Section 7(4) fixes the yearly deduction for a building let for residential use, as a percentage of acquisition or construction cost:

If the real useful life is shorter than 33, 50 or 40 years respectively, you may use the shorter life instead. You deduct only on the cost of the building; the land share of a purchase price is not depreciable, so the price must be split between land and building. This guide does not state how the split is made, and the tax office’s method should be checked.

For homes built or bought in the year of completion, section 7(5a) allows a declining-balance option of 5% a year of the remaining book value, where construction began after 30 September 2023 and before 1 October 2029 (or the purchase contract was signed in that window). The taxpayer can switch back to straight-line depreciation later. On a building depreciated this way, deductions for extraordinary technical or economic wear are not allowed.

Section 7b adds a special depreciation for new rental housing: up to 5% a year in the year of acquisition or construction and the next three years, on top of ordinary depreciation, for dwellings applied for after 31 December 2022 and before 1 October 2029 in a building meeting the “Effizienzhaus 40” standard with a sustainability class. Costs must not exceed €5,200 per square metre of living space, the basis is capped at €4,000 per square metre, and the flat must be let for residential use for the year of acquisition and the following nine years.

Renovation soon after purchase

Section 6(1) no. 1a EStG says that repair and modernisation work done within three years of buying a building counts as construction cost, rather than as an immediate deduction, if it exceeds 15% of the building’s purchase cost (before VAT). Extensions and annual routine maintenance are not included. Plan work and its timing with this threshold in mind.

If you live abroad

Section 49(1) no. 6 EStG taxes income from letting where the property is located in Germany or registered in a German public register, so a non-resident owner of a German flat has German taxable income. Section 50(1) limits their deductions to expenses connected to German income, and it makes a number of personal deductions and allowances inapplicable, among them those in sections 32 and 33. The bill depends on your situation and on any tax treaty between Germany and your country of residence; see the treaty guides for the United Kingdom, the United States and Canada, and renting out as a non-resident.

When you sell

If you sell within ten years of buying, the gain may be taxable under section 23 EStG; see capital gains tax and the ten-year rule. Depreciation lowers the cost basis, so it matters on a sale.

Which professional to consult

A tax adviser (Steuerberater) prepares the return and the land-building split. A property valuer can produce a valuation that supports the split. For the full purchase budget see the purchase costs calculator.