Tax Benefits of a German Buy-to-Let Property: What You Can Actually Deduct

"You can write all of that off." You hear it constantly when buying property in Germany, usually from someone who couldn't say exactly what. Yet a substantial part of the return is decided by that question. Here's what the tax office genuinely accepts, what it doesn't, and where the traps sit that catch even experienced buyers.

Depreciation: the biggest deduction nobody pays for

Absetzung für Abnutzung, or AfA, is the most important tax benefit of a rented property and also the strangest: it reduces your tax bill without any money leaving your account. The law assumes a building wears out over time and lets you claim that notional decline every year.

Which rate applies is decided purely by the year the building was completed (§ 7 Abs. 4 EStG):

• Completed before 1925: 2.5% per year
• Completed 1925 to 2022: 2% per year
• Completed from 2023: 3% per year

Plenty of calculators just assume 2%. On a 1908 building that is a quarter less depreciation than you are entitled to, every single year.

What the depreciation is calculated on

This is where the expensive mistakes happen. Two rules matter:

First: the land is never depreciated. Land doesn't wear out, so it stays out of the calculation entirely. Only the building counts. How much that is depends on location: in Munich a far larger share of the price sits in the land than in Chemnitz. This split isn't a detail, it's a lever that works across your entire holding period.

Second: the purchase costs are included. Transfer tax, notary, land registry and agent commission are acquisition-related costs. They aren't deducted in the year of purchase; they're capitalised together with the price and depreciated with it, again apportioned to the building. Anyone building the depreciation base from the purchase price alone gives up a meaningful sum, given that closing costs today routinely run to ten percent or more. Our overview of transfer tax by federal state has the rate for your state.

Had this been calculated at 2% and without the closing costs, so on a base of €134,400, the depreciation would have been €2,688. The €1,130 annual difference isn't a rounding error; across twenty years it's a five-figure sum.

Interest yes, principal no

German tax law draws a clean line through the mortgage payment: the interest portion is deductible, the principal portion is not. It makes sense once you think it through. Interest is the price of borrowed money, so it's a genuine expense. Principal repayment merely pays back the loan and converts debt into equity, so it doesn't make you any poorer.

In practice that means the tax relief is largest in the early years, when the interest share is high. As the loan amortises the ratio reverses, the deductible portion shrinks, and your tax bill rises even though your payment stays the same. We work through what that does to monthly cashflow in the guide on calculating property cashflow.

Renovation: deductible now, or stretched across decades

Buy an existing flat and you'll almost certainly renovate. This is exactly where it's decided whether your builders' invoices reduce your tax in year one, or whether you write them down in two-percent slices over forty years. The difference is enormous, and it hangs on a single number.

The 15% trap

If your repair and modernisation spending within three years of purchase exceeds 15% of the building's acquisition cost, measured net of VAT, it is reclassified as acquisition-related construction cost (§ 6 Abs. 1 Nr. 1a EStG). At that point none of it is immediately deductible; it all moves into depreciation.

Two details are routinely underestimated. First, cosmetic work counts too: wallpapering, painting, floors. The Federal Fiscal Court settled that in 2016, and the current administrative guidance, the Finance Ministry letter of 26 January 2026, confirms it. Second, the three-year clock runs to the day from the transfer of possession, risk and benefits, not from the notary appointment.

In the example above the limit sits at €152,727 × 15% = €22,909. Spend €22,000 and you deduct all of it. Spend €24,000 and you deduct none of it immediately. Two thousand euros of extra invoices cost roughly ten thousand euros of accelerated relief here. The obvious countermeasure is as simple as it is effective: push non-urgent work into the fourth year.

Two things fall outside the 15% test, incidentally: extensions, such as an added storey or dormer, and maintenance that recurs annually, such as servicing the heating system.

When the standard goes up

Regardless of amount or timing, there's a second route into capitalisation: raise the standard in at least three of the four central equipment categories and you have a substantial improvement, which is construction cost. The four are exhaustively listed: heating, sanitary, electrical and windows. New façade insulation expressly does not count towards it, however worthwhile it may be.

The spreading option under § 82b EStDV

If your spending stays classified as maintenance, you have a choice: deduct it in full immediately, or spread it evenly across two to five years. That sounds like paperwork but it's real planning. A €30,000 deduction does you little good if your taxable income can't absorb it. Spread over five years it lands where your marginal rate is highest.

Listed buildings and redevelopment areas: the underrated category

If a property is a protected monument (§ 7i EStG) or sits in a formally designated redevelopment area (§ 7h EStG), qualifying restoration spending is written off on completely different terms: 9% a year for eight years, then 7% a year for four. That's 100% inside twelve years, against 2% or 2.5% across forty or fifty.

It also turns the 15% trap from a problem into a non-event. Spend €40,000 on a listed building and blow through the limit and you lose nothing; you write the whole amount off within twelve years. Both routes require a certificate, from the heritage authority for a monument and from the municipality in a redevelopment area. And as a buyer, only work carried out after the purchase contract was signed counts.

Whether an address falls inside a redevelopment area is a matter of public record. A ten-minute call to the local Bauamt can be worth five figures.

New build: special depreciation and declining balance

Newly built rental housing has two additional routes. The special depreciation under § 7b EStG gives an extra 5% a year for four years on top of ordinary depreciation, tied to a building-application window and, for applications from 2023 onwards, to the Effizienzhaus 40 standard with the QNG sustainability seal. There are also ceilings on construction cost and depreciation base per square metre, plus an obligation to let the property as housing for ten years.

Alternatively, § 7 Abs. 5a EStG permits declining-balance depreciation of 5% of the remaining book value where construction began between 1 October 2023 and 30 September 2029. The benefit is front-loaded: the early years give considerably more than straight-line. Switching to straight-line later is permitted, and at some point it pays to.

What you cannot deduct

Just as important as the benefits are the items many people wrongly count on:

• Principal repayment. As above. It's a shift from cash into equity, not an expense.
• The land. Never depreciated, no matter how the purchase contract is worded.
• Payments into the building's maintenance reserve. This one surprises most people. What you transfer monthly to the owners' association is real money out of your pocket, but it only becomes deductible when the association actually spends it on maintenance. Until then it still belongs to the association, not to a builder.

And at the end: the ten-year clock

One tax benefit that gets discussed too rarely is the sale itself. Sell a rented property after more than ten years and the entire capital gain is tax-free (§ 23 EStG). Sell inside the window and the gain is taxed at your personal rate.

There's a sting here that many discover only at the point of sale: the depreciation you have already claimed reduces the acquisition cost for this calculation. Every euro of write-off you've taken over the years therefore increases the taxable gain if you sell too early. The benefit isn't cancelled, but it is clawed back. Once the ten years are up, that stops happening.

This text reflects the position as of August 2026 and is not a substitute for tax advice. The reliefs described here depend in each case on certificates, deadline checks or elections that your tax adviser has to make.

Keep reading: Real estate transfer tax by state — every rate at a glance →