Depreciation Allowance: Who Qualifies and What You Get

A depreciation allowance is a mechanism that allows you to claim an annual tax deduction to account for the wear and tear on a rental property.

👤Who it's for

This scheme is specifically for landlords who own rental properties. If you own property that is leased to tenants, you may be eligible to use this method to manage your taxable income.

🎁What you get

You get an annual tax deduction that reflects the gradual loss in value of a rental property due to physical wear and tear and aging. This deduction is used to reduce your overall taxable income, which can help with tax-efficient asset accumulation and wealth preservation. By claiming this, you are acknowledging that the building is a depreciating asset, and the government allows you to write off a portion of that loss each year.

💰What it costs you

There is no direct fee to use this scheme, but it does require significant administrative effort. You must maintain accurate accounting records that clearly distinguish between the value of the building and the value of the land. This requires careful documentation of your property's financial details to satisfy the requirements of the tax authorities.

⚠️The catch to know

The most important rule is that you can only depreciate the building itself. You cannot claim any depreciation on the value of the land, as land is considered a permanent asset that does not wear out or lose value due to physical use. You must ensure your calculations correctly separate these two distinct values to avoid errors in your filings.

📝How to apply

1. Determine the specific market value of your building separately from the land it sits on.
2. Maintain precise and detailed accounting records regarding the property's value and any related expenses.
3. Calculate the annual amount for depreciation based on the building's value.
4. Report these figures in your annual tax documentation submitted to the Finanzamt.