Real Estate Depreciation (AfA) and How Property Investors Can Reduce Their Tax Burden

What is AfA (Depreciation for Wear and Tear)?

The AfA (Absetzung für Abnutzung) is a key tax benefit for property investors in Germany. It allows your client to depreciate the building value (not the land) over a defined period — reducing taxable income and therefore increasing net returns.

What exactly is AfA?

• Definition: AfA is an annual depreciation allowance that accounts for the building’s reduction in value over time (e.g., aging).
• Base: Only the building portion of the purchase price (excluding land) is depreciable.
• Rates:
  • For buildings constructed after 1924: 2% per year over 50 years.
  • For buildings constructed before 1925: 2.5% per year over 40 years.

How does AfA factor into the investment calculation?

1. Annual Depreciation (AfA) Calculation:
   • Example: Building value €800,000 → 2% AfA = €16,000 deductible annually.
2. Tax Impact:
   • AfA reduces taxable rental income.
   • Example:
     • Rental income: €30,000
     • Expenses incl. AfA: €20,000
     • → Taxable income: only €10,000
3. Net Benefit:
   • Depending on the tax rate (e.g., 42% top rate), this can save thousands of euros annually.
   • The higher the tax bracket, the greater the tax-saving impact.

Summary

AfA makes real estate investments more attractive by:

• Boosting after-tax cash flow
• Creating a tax buffer, especially in early years
• Having the potential to turn a cash-negative property into a cash-positive one, depending on income level and leverage.

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