Depreciation (AfA) and Real-Estate Transfer Tax: How Incidental Costs Raise Your Depreciation

What depreciation (AfA) is and why only the building counts

Depreciation (Absetzung für Abnutzung), governed by § 7 of the Income Tax Act (EStG), reflects the annual loss in value of an asset for tax purposes. For rented or commercially used properties, you may deduct the acquisition or production costs spread over the useful life as income-related expenses or business expenses. This lowers your taxable income without any money actually leaving your account in the respective year.

One distinction, strictly maintained in tax law, is decisive: only the building is depreciated. The land does not wear out according to tax logic and is therefore a non-depreciable asset. There is no depreciation for it. Anyone who acquires a developed property buys both together but must, for tax purposes, allocate the costs cleanly to the two components.

This distinction is the key to the entire topic. It determines which share of your purchase price and your incidental costs is depreciable at all and which remains tax-neutral.

Why real-estate transfer tax raises the depreciation basis

The real-estate transfer tax falls due once upon the transfer of ownership and amounts to 6.5 percent of the purchase price in North Rhine-Westphalia. Contrary to common belief, it is not a lost item for tax purposes. It arises on the occasion of the acquisition and therefore counts among the property's incidental acquisition costs (Anschaffungsnebenkosten).

The decisive factor is the commercial-law concept of acquisition costs in § 255 (1) of the Commercial Code (HGB). Under it, acquisition costs include all expenses incurred to acquire an asset and put it into an operational condition, including incidental costs. Via § 6 EStG this definition extends into tax law and via § 9 EStG into the area of income-related expenses for rentals.

The consequence is economically advantageous for you: the real-estate transfer tax does not merely increase the purchase price but flows proportionally into the building's depreciation basis (AfA-Bemessungsgrundlage). Precisely the portion of the transfer tax that arithmetically falls on the building can therefore be depreciated over the years.

Which incidental costs belong in the depreciation basis

The real-estate transfer tax is not the only incidental cost item that is depreciable. The incidental acquisition costs that proportionally increase the building's depreciation basis typically include:

• Real-estate transfer tax (Grunderwerbsteuer) on the acquisition of the plot,
• Notary fees for notarizing the purchase contract,
• Land register fees for the transfer of ownership,
• Broker's commission, insofar as it relates to the acquisition.

The distinction from financing costs is important. Fees for registering a land charge or notary fees serving to establish the land charge are not part of the acquisition costs. They are costs of raising money and, for rented objects, are accounted for separately as ongoing income-related expenses, not spread over depreciation.

All other incidental costs also share the fate of the purchase price: since they relate to the acquisition of the entire developed plot, they are allocated to land and building in the same ratio. Only their building share increases the depreciable basis.

Splitting purchase price and incidental costs between land and building

Since only the building may be depreciated, the purchase price and incidental costs must be split into a land share and a building share. The customary split follows the ratio of the market values of the land on one side and the building on the other. A flat ratio, for example a fixed 80 to 20, is not permitted for tax purposes.

You usually determine the land value via the local standard land value (Bodenrichtwert) and the plot size. For the split, the Federal Ministry of Finance provides a worksheet for purchase-price allocation (Arbeitshilfe zur Kaufpreisaufteilung), which tax offices and taxpayers use for guidance. If the purchase contract already contains an appropriate, plausible allocation, the tax office may follow it. If it is not comprehensible, the tax authority makes its own allocation.

A simplified example: if, according to market values, 70 percent falls on the building and 30 percent on the land, then the purchase price and all incidental acquisition costs are split in this ratio too. Only the 70 percent that falls on the building forms your depreciation basis. A careful, market-based valuation of the shares therefore pays off directly, because a higher building share means more depreciation over the entire term.

The straight-line depreciation rates under § 7 (4) EStG

For most rented residential properties, the straight-line depreciation applies, under which the same percentage of the basis is deducted each year. The level depends on the year of the building's completion:

• 3 percent annually for residential buildings completed after 31 December 2022. This increased rate was introduced to promote housing construction and corresponds to a useful life of around 33 years.
• 2 percent annually for buildings completed after 31 December 1924 and before 1 January 2023, which corresponds to a useful life of 50 years.
• 2.5 percent annually for buildings completed before 1 January 1925, that is, for older existing structures.

For commercially used buildings that do not serve residential purposes, § 7 (4) EStG provides a rate of 3 percent where the building application was filed after 31 March 1985. Decisive for the 3-percent rate for residential buildings is always the completion, not the time of your purchase. If an actually shorter useful life can be proven, a higher rate may exceptionally be applied.

Special cases: first year, new builds and owner-occupation

In the year of acquisition, depreciation is calculated pro rata by months. If you take over a property on, say, 1 July, you apply only 6 of 12 monthly shares for that year. In subsequent years the full annual rate then applies.

For newly built rental residential buildings, a time-limited declining-balance depreciation may additionally come into consideration under certain conditions, as may special depreciation for new rental-housing construction. These special routes are tied to strict conditions and should be examined case by case with professional support.

The situation is quite different for owner-occupation: if you live in the property yourself, you generate no income from it. Consequently, there are no income-related expenses and no depreciation. The real-estate transfer tax and the other incidental costs do then increase your acquisition costs, but have no tax effect through ongoing depreciation. Only upon a later taxable sale can they regain significance for determining the gain.

Depreciation in the tax return: the Anlage V

For rented properties, you declare your income from renting and leasing in the rental income schedule Anlage V of the income tax return. There you enter the rental income and set against it the income-related expenses, among which depreciation belongs.

The procedure in brief: you first determine the total acquisition costs from the purchase price and all incidental acquisition costs, including the real-estate transfer tax. You split this total amount according to the market-value ratio between land and building. Only the building share is your depreciation basis. To this you apply the appropriate depreciation rate and enter the annual amount as depreciation in the Anlage V.

Keep the purchase contract, the incidental-cost receipts and your allocation calculation carefully. The tax office checks the plausibility of the purchase-price allocation, and comprehensible documentation eases its acceptance. For the binding entry in your tax return, your own tax adviser is the right place to turn.