Rental Property and Depreciation: A Tax-Saving Guide for Employees in Germany
Buying a second property to rent out is one of the few ways an employee can turn German tax law itself into a deduction. Here's how AfA depreciation, deductible costs, and loss offsetting actually work, with real, calculated numbers.
EswarPublished August 26, 202614 min read
Quick answer
If you buy a second property and rent it out, German tax law treats it as its own income category (Einkünfte aus Vermietung und Verpachtung), separate from your salary, and a loss in that category directly reduces your total taxable income. The biggest lever is AfA (building depreciation): 2% a year for existing buildings, 3% per year for buildings completed after 31 December 2022, subject to the applicable AfA rules, and considerably more under the special programs for new construction or listed buildings. In the early years, financing costs plus depreciation routinely exceed the rent, producing a loss that lowers the tax on your salary too, not a loophole, just how two income categories combine on one tax return. Run your own numbers in the rental property tax calculator.
Educational overview only, not tax advice. Every rule here has edge cases and interacts with your personal situation, always confirm specifics with a Steuerberater before acting on any of it.
Why this works at all
None of this is a loophole. It's the direct, intended consequence of two facts written into German tax law: first, that rental income is its own separate income category, computed independently of your salary and then combined with it; second, that a building is treated as a real, gradually-consumed cost of earning that income, even though you didn't hand anyone a cheque for "depreciation" this year. Put those two together, and a leveraged, freshly-bought rental property routinely runs at a loss for tax purposes long before it runs at a loss in cash terms, and that paper loss reduces the tax on income you're earning anyway.
This is also precisely why the German government uses it as policy: every accelerated-depreciation program below exists specifically to make building or renovating housing more attractive by making the tax benefit larger and faster, not because landlords lobbied for a loophole, but because the state wants more housing built and more historic buildings preserved, and depreciation is the lever it controls.
How a rental loss actually lowers your tax bill
Germany taxes seven separate categories of income (Einkunftsarten), and your salary (Einkünfte aus nichtselbständiger Arbeit) is only one of them. Rental income is reported as its own category under §21 EStG: rent minus the costs of earning it (Werbungskosten) minus depreciation (AfA). After those are accounted for, the resulting rental profit or loss generally flows into your total taxable income (zu versteuerndes Einkommen, zvE) alongside every other category, which the progressive §32a formula then taxes.
That's the mechanism that matters: if the rental category comes out negative, a routine outcome in the first several years once mortgage interest and depreciation are counted, that loss offsets directly against your salary income on the same tax return (Verlustausgleich). You don't get a separate refund for "losing money on the apartment"; you get a smaller zvE, and therefore less tax on the salary you'd be paying regardless.
Concretely: say your zvE would otherwise be €55,000 as a single filer. A newly bought apartment brings in €9,000 in rent for the year, against which you deduct €6,000 of mortgage interest, €3,500 of AfA, and €5,500 of other running costs, a €6,000 loss. Combined with the rest of your income, your zvE drops to €49,000.
How much of the purchase you finance matters enormously here, since it's specifically the interest, not the property itself, that drives the loss. A property bought entirely in cash has no mortgage interest to deduct at all, only AfA and running costs, so it produces a much smaller loss, or none. The same property financed at, say, 80% loan-to-value carries several thousand euros of annual interest in its early years, which is exactly what tends to push the rental category into the red. This is a genuine trade-off, not a free upgrade: more leverage means a larger tax benefit today, but also more debt, more interest-rate risk on refinancing, and a larger loss to defend if the tax office ever questions the property's profit outlook.
Tax saved: €2.149
Both figures are the actual §32a income-tax formula (the same one behind this site's own calculator), not an estimate. Tax on €55,000 is €12,347; tax on €49,000 is €10,198. The €6,000 loss saved €2,149, about 36% of the loss itself, not 100%, since Germany taxes progressively rather than at one flat rate. A higher earner in a higher bracket keeps a larger share of each euro of loss: at a €70,000 zvE, an €8,000 loss saves €3,253, about 41%.
Depreciation (AfA): the lever that makes this work at all
You can't deduct what you paid for the building as a cost outright, land and buildings are capital assets, not expenses, but you can deduct its gradual loss of value over time. That's AfA (Absetzung für Abnutzung), and for residential rental buildings it's fixed by law, not by how fast the building actually wears out.
- 2% a year for buildings completed between 1925 and 2022 (a 50-year schedule), per §7 Abs. 4 EStG.
- 3% a year for buildings completed after 31 December 2022 (a roughly 33-year schedule), the same paragraph, raised specifically to make new construction more attractive.
- 2.5% a year for buildings completed before 1925.
AfA is calculated on the building's share of the purchase price only, land itself never depreciates, so the purchase contract's land-vs-building split (or a professional valuation, if the contract doesn't itemize one) directly determines your annual deduction.
Three ways to depreciate faster
Beyond the standard rate, three separate provisions let you write off a new or listed building considerably faster, each with its own conditions.
Degressive AfA (§7 Abs. 5a EStG). For residential buildings where construction started between 1 October 2023 and 30 September 2029, you can instead depreciate 5% of the building's remaining book value each year, a declining-balance method that front-loads the deduction rather than a flat percentage of the original price. A later switch to the standard linear method is allowed once that becomes more favorable.
Sonderabschreibung für den Mietwohnungsneubau (§7b EStG). On top of standard AfA, new rental housing can claim an extra 5% a year for the year of completion plus the following three years (four years total), effectively 8%/year in that window for a post-2022 building. Two hard limits apply: construction costs can't exceed €5,200 per square metre of living space (cross that line by even €1, and the entire special depreciation is forfeited, not just the excess above it), and the deduction itself is calculated on at most €4,000/m² even where actual costs are lower than the €5,200 ceiling. That ceiling isn't only an upfront check, either: if later construction costs, incurred within three years after the year the building was completed, push the total over that same €5,200/m² line, the special depreciation already claimed is reversed in full under §7b Abs. 4 EStG, not just for the excess. This current, post-2022 §7b regime also requires the building to meet the "Effizienzhaus 40 mit Nachhaltigkeits-Klasse" energy standard, certified via a QNG seal, an earlier pre-2022 version of §7b used different cost limits and had no such energy requirement.
Denkmal-AfA (§7i EStG). If the building is an officially listed monument (Baudenkmal) and the spending is a certified preservation or modernization measure, not the acquisition cost of the building itself, you can deduct 100% of the qualifying renovation costs over just 12 years: 9% a year for the first eight years, then 7% a year for four more. It requires a formal certificate (Bescheinigung) from the state monument-protection authority, and applies only to the renovation, never to what you paid to buy the building. One exception: buying from a developer who's already contractually committed to the renovation (an Erwerbermodell) can extend Denkmal-AfA to the part of your purchase price attributable to construction measures carried out after your own purchase contract took effect, not the whole price, and not work finished before you signed.
Two worked examples make the difference concrete. An 80m² new-build apartment costing €380,000 to construct sits comfortably under the €5,200/m² cost ceiling (€416,000), so the special depreciation isn't forfeited. Standard 3% AfA applies to the full €380,000: €11,400 a year. The extra §7b depreciation is capped at €4,000/m² regardless of the actual cost: 5% of €320,000, or €16,000 a year, for the first four years only. Combined, that's €27,400 a year of depreciation, over €109,000 in total, before the special allowance drops away and only the €11,400 standard AfA continues.
Separately, €150,000 spent on certified preservation work on a listed building generates €13,500 a year (9%) for the first eight years, €108,000 in total, then €10,500 a year (7%) for four more, the remaining €42,000, deductions totaling the full €150,000 by year 12. The identical €150,000 spent on an ordinary, non-listed renovation is treated differently: whether it's deducted immediately in the year paid or has to be capitalized and spread across decades of standard AfA depends on the nature of the work and, for renovations within three years of buying the building, on the §6 Abs. 1 Nr. 1a EStG rules covered below, either way, a materially different outcome from Denkmal-AfA's guaranteed 12-year recovery.
Cumulative share of building/renovation cost written off by year. All four rates are the actual statutory percentages (verified directly against §7 Abs. 4/5a, §7b and §7i EStG), not approximations. A further option, not shown here, exists for some new-build rental housing: 5%-of-remaining-value degressive AfA under §7 Abs. 5a EStG, an alternative to the flat 3% linear rate shown (not an addition to it), typically with a later switch to linear AfA for full recovery within the building's useful life.
Which path fits your situation, at a glance
| Situation | Rate & duration | Requirement |
|---|---|---|
| Buying an existing building | 2% a year (2.5% if completed before 1925), straight-line over up to 50 years (§7 Abs. 4 EStG) | Any purchase of an already-completed building; no application needed |
| Buying or building new | 3% a year straight-line (33 years), or 5% declining-balance if construction started Oct 2023-Sep 2029 (§7 Abs. 4/5a EStG) | Building completed after 31 December 2022 |
| New rental housing, boosted | Up to 8%/year combined for the first four years, then 3%/year afterward (§7b EStG) | New rental housing, Effizienzhaus-40 standard, construction costs capped at €5,200/m² (the bonus itself is calculated on at most €4,000/m², a separate, lower cap) |
| Renovating a listed building | 100% of renovation costs over 12 years: 9%/year for 8 years, then 7%/year for 4 years (§7i EStG) | Officially listed Baudenkmal; certified preservation/modernization work only |
What else counts as a deductible cost (Werbungskosten)
Beyond AfA, §9 EStG lets you deduct most of the costs of earning the rental income as Werbungskosten, though the exact timing and treatment depend on the type of expense. Commonly fully deductible in the year you pay them:
- Mortgage interest, not the repayment of principal, which is never deductible
- Property management and administration fees (Hausverwaltung)
- Grundsteuer (property tax) and building insurance
- Maintenance and repairs (Erhaltungsaufwand), as long as they don't trip the anschaffungsnahe-Herstellungskosten rule below
- Travel costs to the property for genuine management purposes
- Advertising costs for finding a tenant
In practice, this list is what usually turns a property that looks profitable on paper into a tax loss in the first few years: mortgage interest is heaviest early on, while AfA is a fixed annual amount regardless of how the property actually performs.
Two traps that catch first-time landlords
Spend too much on renovations in the first three years, and you lose the immediate deduction entirely. Under §6 Abs. 1 Nr. 1a EStG, if repair and modernization costs within three years of buying the building exceed 15% of the building's purchase price (net of VAT), the entire amount, not just the excess, is reclassified as anschaffungsnahe Herstellungskosten: construction cost, not a current-year expense. It then has to be depreciated via AfA over decades instead of deducted immediately. This is a hard cliff-edge (a Freigrenze), not a gradual phase-out: one euro over the line reclassifies everything, so timing renovations around the three-year mark, or getting a reliable cost estimate before starting, matters more than it might seem.
Renting to family below market rate can cost you your full deduction too. Under §21 Abs. 2 EStG, charge a relative less than 50% of the local comparable rent (ortsübliche Miete) and your costs must be split proportionally between the paid and unpaid portion, only the paid share stays deductible. Charge at least 66%, and the tenancy counts as fully paid, full deduction, no further test. Between 50% and 66%, the full deduction is still available, but only if you can show a positive Totalüberschussprognose, a long-run profit forecast covering the whole expected holding period.
Selling later: the 10-year rule
Sell within 10 years of buying (§23 EStG, counted from the notarized purchase contract to the notarized sale contract) and the profit is taxed as a private disposal transaction (privates Veräußerungsgeschäft) at your normal income tax rate, on top of everything else. Depreciation you've already claimed doesn't reduce this bill, it's added back into the calculation, since it already lowered your cost basis.
The exception: if you lived in the property yourself, exclusively, for the entire period you owned it, or in the year of sale plus the two preceding calendar years, the sale is entirely tax-free regardless of how long you owned it. That two-preceding-years rule is counted in calendar years, not full 24-month periods, so moving in during December, staying through the following year, and selling the January after that can be enough.
A pure rental property, one you've never lived in, gets no such exception. If you're planning to sell within 10 years, factor this tax into your return calculation from day one, not as an afterthought.
What it costs to buy: property transfer tax varies by state
Before any of the above applies, buying at all costs Grunderwerbsteuer (property transfer tax): a one-time tax on the purchase price that each of the 16 states has set independently since 2006. It ranges from 3.5% in Bavaria to 6.5% in four states, a genuine €15,000 difference on a €500,000 property, purely because of where it is.
This tax is due regardless of whether you'll live in the property or rent it out, and it isn't deductible as a current-year Werbungskosten cost. It's added to the building's purchase price instead, which increases the base your AfA depreciation is calculated on, so you do recover a small fraction of it over the following decades, just not immediately.
Who this actually suits
This isn't a strategy for everyone, and a responsible read of it should say so plainly. It tends to work best for:
- Employees with stable, meaningfully-taxed salary income, the chart above shows why: the higher your marginal rate, the more a given euro of rental loss is worth
- People planning to hold the property for at least 10 years, avoiding the private-disposal tax on a later sale entirely
- Buyers who can genuinely afford the property without the tax saving, the deduction reduces the cost of a decision you'd make anyway; it shouldn't be the reason you make it
It's a poor fit if you'd be financially stretched by a vacancy or a large repair bill, or if you're counting on rental losses continuing indefinitely: the tax office can and does deny loss recognition entirely (Liebhaberei, treated as a hobby rather than an income-generating activity) if a property never shows a realistic path to an overall profit across its expected holding period.
Common mistakes worth avoiding
A few things people frequently get wrong:
- Deducting the loan repayment, not just the interest. Only the interest portion of a mortgage payment is deductible; principal repayment is never a cost, it's converting debt into equity.
- Front-loading renovations without checking the 15% rule first. A full renovation right after buying is the single most common way to accidentally trigger anschaffungsnahe Herstellungskosten and lose years of immediate deductions.
- Assuming the special depreciation programs stack freely. §7b's Sonderabschreibung can combine with degressive AfA, but each has its own cost ceilings and deadlines; check both apply before counting on either.
- Forgetting Grunderwerbsteuer in the return-on-investment math. It's a real, immediate cash cost of 3.5-6.5% that many first-time buyers only budget for after signing.
Sources & legal references
This is a financial and legal topic with real cliff-edges, so verify current figures and rules directly against these sources, and against your own purchase contract, before acting on them.
- §7 EStG: §7 EStG: standard and degressive building depreciation rates (Abs. 4 and Abs. 5a).
- §7b EStG: §7b EStG: Sonderabschreibung für den Mietwohnungsneubau, its cost ceilings and deadlines.
- §6 EStG: §6 Abs. 1 Nr. 1a EStG: the anschaffungsnahe-Herstellungskosten 15% rule.
- §21 EStG: §21 EStG: rental income as its own Einkunftsart, and the verbilligte-Vermietung rules in Abs. 2.
- §23 EStG: §23 EStG: the 10-year Spekulationsfrist and the owner-occupation exception.
- §7i EStG: §7i EStG: Denkmal-AfA for listed buildings.
- Grunderwerbsteuergesetz (GrEStG): Grunderwerbsteuergesetz (GrEStG): the federal framework letting each state set its own rate since 2006.
See how a rental loss would change your own tax bill
Frequently asked questions
Can I deduct the property's full purchase price?
No, not directly and not immediately. Land never depreciates, and the building portion is deducted gradually via AfA (2% or 3% a year under §7 Abs. 4 EStG, or faster under one of the special programs above), not as a lump sum. The purchase contract's land-vs-building split, or a professional valuation if the contract doesn't itemize one, determines how much of the price is depreciable at all.
Is there a limit on how much rental loss I can offset against my salary?
There's generally no fixed annual percentage cap on genuine rental losses from ordinary private property letting, unlike, for example, losses from certain capital-market transactions, which do face restrictions. Loss utilization can still be affected by specific anti-abuse rules, and in particular by whether the letting activity is genuinely intended to generate a long-term profit: the tax office can deny the loss retroactively (Liebhaberei) if the property, over its realistic expected holding period, was never likely to turn an overall profit.
Do I need a tax advisor to do this?
Not legally, but in practice almost every landlord uses one, or at minimum dedicated rental-property tax software, since Anlage V (the rental-income tax form) requires categorizing costs correctly, and getting the anschaffungsnahe-Herstellungskosten calculation right the first time avoids a much more expensive correction later. This article explains the mechanics; it isn't a substitute for someone reviewing your specific purchase contract and renovation plans.
What if I live in part of the building myself?
Only the rented-out portion, apportioned by floor area, is treated as rental income for Werbungskosten and AfA purposes. The part you occupy yourself is private and gets none of the deductions described here, though it may separately qualify for the §35c energy-renovation tax credit, subject to its own eligibility requirements, which applies only to self-occupied space, not to anything you rent out.
Does it matter how much of the purchase I finance versus pay in cash?
Yes, substantially. The tax loss in the early years comes mainly from mortgage interest plus AfA exceeding the rent, so a heavily financed property generates a much larger deductible loss than the same property bought outright in cash, which has no interest to deduct at all. That's a real trade-off between a larger tax benefit now and carrying more debt and interest-rate risk, not something to maximize purely for the deduction.
This article is for general informational and educational purposes only and does not constitute formal tax, legal, or insurance advice (Steuer-, Rechts- oder Versicherungsberatung).