Dusseldorf. Kruno Crepulja, head of the project developer Instone, recently presented surprising figures in an interview with Handelsblatt. “We see very high demand from investors, at a higher level than in the heyday of the real estate boom.”
The reason for this strong interest is the modified reintroduction in 2024 of special depreciation on the purchase of new rental apartment buildings for capital investment, known as special depreciation for short. The legislature wants to create tax incentives to create urgently needed new and energy-efficient living space.
In order to capture the dimension of the tax advantages, the Handelsblatt has calculated an example case based on an Instone calculation and with the addition of further expert assessments, which shows the general conditions under which such an investment can make sense for high earners and which points should be taken into account.
In addition to the special depreciation, there are two basic depreciation options for residential buildings. On the one hand, with the linear depreciation, depending on the completion date, two or three percent per year can be depreciated on the acquisition or production costs of a residential property. Alternatively, under certain conditions, five percent of the residual value can be depreciated in the first year and five percent in the following years using the degressive building depreciation method. This means that in these variants, a property is depreciated in equal or decreasing annual amounts.
With the special depreciation, significantly higher depreciation can be made at the start of use: "The new legislation offers the possibility of starting on a declining scale with five percent. If you reach the highest new building standard QNG 40, you can even add another five percent," said Crepulja. Martin Lange, specialist lawyer for tax law and tax law advisor to the broker association IVD, adds: “The special depreciation is added to the regular linear or degressive depreciation.”
Instone calculates what this means in practice using an example property with 85 square meters and a purchase price of 484,500 euros. There, more than 140,000 euros can be written off for tax purposes within the first four years, and over 200,000 euros within ten years. According to Instone, this results in tax savings of almost 65,000 euros in four years, i.e. more than 15,000 euros per year. Over a ten-year period it is almost 100,000 euros, so on average around 10,000 euros per year. In this example, the special depreciation accounted for almost 32,000 euros over four years, which means around 8,000 euros in tax savings per year.
This is not a real tax refund from the tax office, but rather tax savings through higher depreciation, which reduces taxable income and thus lowers the tax burden.
However, tax lawyer Lange says that the special depreciation only offers the possibility of calculating higher costs against the rental income in the first four years. However, the total depreciation volume always remains the same, so you can write off less in subsequent years.
Lange also emphasizes that sample calculations of this type can only be an approximation: “In the end, it always depends on the depreciable building portion of the property, your personal income situation and the corresponding tax rate,” says Lange. "In practice, the proportion of land to building can be significantly more disadvantageous for the taxpayer than is modeled here. This must be examined individually for each individual case."
Nevertheless, it shows how great the potential of such a purchase is: “As a high earner, I can hardly save taxes on this scale with any other investment,” says project developer Crepulja.
To finance the example apartment, our fictitious investor contributes around 135,000 euros in equity and gets the remaining money from the bank at an interest rate of 3.5 percent. He calculates a rental yield of four percent. Converted, this means a monthly rent of 1,625 euros, i.e. 19.11 euros per square meter. This is a realistic value for a new building given the current construction costs, especially in metropolitan regions. The monthly bank rate is 1,615 euros with a repayment of 1.5 percent. To put it simply, the apartment supports itself.
This financing example is also just an approximation. There are KfW funding options with low interest rates for QNG 40 buildings, so there is still potential for optimization here. This standard combines particularly low energy consumption (40 percent of a reference building) with a state-certified sustainability assessment (“Sustainable Building” quality seal). Depending on your income situation and the bank's calculations, it may also be possible to obtain financing with less equity investment, even if the bank rate therefore exceeds the rental income.
This may become relevant for further investments of this type. So far, the special depreciation is running for a limited time until 2029. If the necessary equity is available, it could be worthwhile on paper for high earners not to stick with a single apartment in order to further optimize the tax burden.
The tax savings from previous investments can be contributed as part of the necessary equity capital. “It will certainly not be possible to collect all the equity for the next purchase from the tax effects of the special depreciation alone, but it can definitely be a sensible strategy for further tax optimization,” says Lange.
Crepulja points to another option that these investments offer. After ten years, the property can be resold tax-free; before that, the sale must be taxed. “The current legal situation as a whole is very, very attractive for investors,” he says.
Since the tax office critically examines such investments, investors should be sure that all the required conditions for the special depreciation are met. This includes, for example, that the construction costs per square meter are capped at 5,200 euros. These are not identical to the square meter costs of the purchase price. Rather, the developer must show the construction costs and the land costs separately.
In our example calculation, the purchase price per square meter is 5,700 euros, the construction costs per square meter are 5,048 euros. This separation of purchase prices and construction costs also makes it possible to buy such new buildings in metropolitan regions, even though the purchase prices are more than 7,000 euros per square meter.
The Federal Finance Court ruled on another pitfall last summer. The plaintiff demolished an existing house and built a new house on it. The judges decided that no new living space was created as a result - and rejected the special depreciation.
Tax lawyer Lange therefore points out that buyers should check carefully whether the property being purchased is really a new apartment within the meaning of the law. "The ruling has given rise to new open questions. The BFH has left it open whether the special depreciation can be claimed if the replacement building creates more apartments than were demolished, for example because a single-family house was demolished and replaced by a two-family house or an apartment building," said the expert.
