The declining balance depreciation (tax deduction for wear and tear and loss of value) for residential buildings in accordance with Section 7 (5a) of the German Income Tax Act (EStG) is a key part of the recently passed “Growth Opportunities Act” and a tax measure aimed at stabilizing the construction and real estate sector and significantly boosting new residential construction in Germany. The faster refinancing of investments made is intended to create market-stimulating incentives and urgently needed living space.

In the case of declining balance depreciation, you can write off 5% of the investment costs for buildings used for residential purposes each year (in this case, you do not have to use the straight-line depreciation method). This depreciation option only applies in two cases: Firstly, either you build the building yourself (or have it built directly on your behalf): in this case, you can claim declining balance depreciation if construction of the building begins after September 30, 2023 and before October 1, 2029. The start of construction is deemed to be the start of construction notification. Secondly, you buy a building: In this case, the declining balance depreciation is only possible if the obligatory contract is concluded with legal effect after September 30, 2023 and before October 1, 2029. In addition, the property must be acquired by the end of the year of completion, which requires the transfer of benefits and encumbrances by the year of completion (Section 7 (5a) EStG). There is no upper limit on construction costs.

Depreciation is based on a 5% rate by which the assessment basis is reduced annually. If the building is completed or the transfer of benefits/encumbrances takes place on January 1 of a year, 5% of the investment costs of the building can be depreciated in the first year. In the event of completion or a change of use/encumbrance during the course of the year, depreciation is reduced by 1/12 in the first year. From the second year onwards, however, the percentage is applied to the residual value of the building in the previous year. The depreciation reduces the taxable income and could therefore lead to direct tax savings.

In contrast to straight-line depreciation, declining balance depreciation captures the effects of wear and tear dynamically and thus reflects the loss in value of residential buildings much better. If a building previously allowed 3% straight-line depreciation, for example, you could continuously deduct 3% from the original acquisition or production costs for tax purposes. With declining balance depreciation, on the other hand, you can claim higher depreciation for tax purposes in the first few years in particular, whereas this is reduced in later years due to depreciation of the residual value.

This could result in potential tax savings and liquidity advantages for you, such as

• significantly higher depreciation amounts in the first few years
  Faster refinancing of investments made

Degressive depreciation

• Dynamic depreciation
• 5% deduction
• Significantly higher depreciation amounts in the first few years
• Realistic depiction of depreciation

Straight-line depreciation

• Uniform depreciation
• Different: 3% for residential buildings completed after 31.12.2022
• Constant depreciation amounts, therefore higher in later years
• Rather unrealistic representation of depreciation

It is possible to switch to straight-line depreciation. We will be happy to explain to you in a personal consultation when and under what conditions a switch makes sense.

• Government tax gift
• Realistic depiction of the reduction in value
• Significantly higher deductions possible in the first few years
• Faster refinancing of investments made possible