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Depreciation - 2 or 4 percent - for rented properties

August 21, 2020 | 75,00 EUR | answered by Steuerberater Knut Christiansen

Hello,
I am planning to purchase a condominium in NRW in a residential park as a capital investment. The land value here is 990 EUR/sqm, built in 1996, asking price 80,000 EUR, size 36 sqm, monthly ground rent of 110 EUR, monthly income of 250 to 260 EUR through a rental pool company, which takes care of everything including final renovation, rental loss, etc. The annuity loan at the bank costs me approximately 195 EUR per month (= about 50 EUR in interest and 145 EUR in repayment), together with the ground rent it amounts to expenses of 195 + 110 = 305 EUR per month. This is offset by the rental income of 250 to 260 EUR per month. So far, so good.

But what about the tax implications? As far as I know, residential properties that are rented out must be depreciated by a linear 2% of the purchase price of 80,000 EUR (land value is not deducted here, right?). I have been informed by my tax advisor, who is currently ill, that a change in the law (due to Corona & the economy) is planned with a (retroactive?) 4% depreciation. This would amount to 266 EUR per month (= 80,000 x 4% : 12 months) plus 110 EUR monthly ground rent and 50 EUR monthly bank interest. So total interest expenses of 426 EUR per month! And in a year, this would be an interest expense of over 5,100 EUR! With an annual rental income of 3,120 EUR, a hefty tax refund would beckon, right?
a) Have I calculated correctly - how much would the tax refund be (assuming a tax rate of 25%, single)?
b) What is the calculation like with a 2% depreciation?
c) How certain is the introduction of an increased 4% depreciation? And would it be retroactive?

Best regards

Steuerberater Knut Christiansen

Good morning and thank you for using frag-einen.com!

I would be happy to answer your question as part of an initial consultation.

First of all: I am not aware of any changes to the straight-line depreciation for residential properties, and I could not find any legislation to that effect in my research. However, in 2018, a temporary special depreciation of an additional 5% in the first 4 years was created for new properties, allowing for a total depreciation of up to 28% (20% plus 4x2%) in the first 4 years. Since the apartment you mentioned was built in 1996, it does not qualify for this benefit (for new apartments, the building permit must have been obtained after August 31, 2018).

So, your tax expenses are as follows:

Depreciation: 80,000 EUR x 2% p.a. = 1,600 EUR
Interest expense: 600 EUR p.a.
Other non-pass-through costs: unknown
Ground rent: 1,320 EUR
Total: 3,520 EUR

If the annual cold rent is approximately 3,100 EUR, you would incur a loss of around 420 EUR per year.

If your average tax rate is 25%, you would receive a tax refund/tax reduction of approximately 105 EUR.

I hope this answers your question. Feel free to reach out with any further questions.

Please note that this forum cannot replace personal advice but serves as an initial tax assessment.

Best regards,
Knut Christiansen
Tax Advisor