How can I optimally use the tax depreciation of buildings?
March 4, 2022 | 40,00 EUR | answered by Lorenzo Hartmann
Dear tax advisor,
my name is Wilhelm Schlüter and a few years ago I purchased a multi-family house that I rent out. Now, I would like to optimize the depreciation possibilities of buildings for tax purposes in order to minimize my tax burden. I already have some knowledge about straight-line and declining balance depreciation, but I am unsure which method is best suited for me.
The current situation is as follows: The multi-family house has a purchase value of 500,000 euros and a useful life of 50 years. I have been using the straight-line depreciation method, which provides for an annual depreciation of 2%. This has helped me reduce my tax burdens so far, but I am unsure if there are more efficient ways to optimize depreciation.
My concern is that I may not be taking advantage of all the tax benefits and may end up paying unnecessarily high taxes. Therefore, I am wondering if it would be wise to switch to declining balance depreciation or if there are other depreciation methods that are more suitable for me. I am also interested in knowing if there are special depreciation allowances or other tax incentives that I can take advantage of.
Can you please explain to me which depreciation method is best suited for my case and how I can optimally utilize building depreciation for tax purposes? Are there any specific regulations or tips that I should consider in order to minimize my tax burden?
Thank you in advance for your help.
Sincerely,
Wilhelm Schlüter
Dear Mr. Schlüter,
Thank you for your inquiry regarding the optimal use of depreciation opportunities for your rented multi-family house. As a tax advisor specializing in rental and leasing, I can help you and provide you with some important information and recommendations.
Firstly, it is good to hear that you are already familiar with the straight-line depreciation method and have been using it so far. This method involves evenly depreciating the acquisition cost of a building over its useful life. In your case, with an acquisition cost of 500,000 euros and a useful life of 50 years, this means an annual depreciation of 2%, which has so far reduced your tax burden.
Now, regarding the question of whether it would be beneficial to switch to the declining balance method: With declining balance depreciation, a higher depreciation is initially made, which decreases over time. This method can lead to greater tax savings in the early years, as the depreciation amounts are higher. However, it is important to note that with declining balance depreciation, overall, less depreciation is taken over the entire useful life of the building compared to straight-line depreciation. In your case, it may therefore be worthwhile to switch to declining balance depreciation, at least for the first few years, to minimize your tax burden.
Furthermore, there is also the option to take advantage of special depreciation or other tax incentives. For example, energy efficiency renovations or heritage property depreciation can bring additional tax benefits. It is therefore recommended to discuss all possible options with a tax advisor to determine which option is best suited for you.
In summary, it may be beneficial to switch from straight-line to declining balance depreciation, at least for the initial years, to minimize your tax burden. Additionally, you should consider all special depreciation and tax incentives to achieve further savings.
I hope this information is helpful to you and I am available for further questions.
Best regards,
Lorenzo Hartmann
