The tax advantage

The structural starting point

A rental property generates Einkünfte aus Vermietung und Verpachtung, income from letting, under §21 EStG. From the gross rent received, three categories of deductions reduce taxable income:

• Operating costs that the owner bears. Including the non-umlagefähig portion of Hausgeld, repairs not passed to tenants, property management fees, advisory and accounting costs, and travel to and from the property.
• Mortgage interest. Interest paid on the loan used to acquire or improve the property is fully deductible. Principal repayments are not deductible, they reduce the loan balance, not taxable income.
• Depreciation, AfA. A statutory percentage of the building's acquisition cost (not the land) deducted each year.

What remains after these deductions is the taxable rental result. It is added to (or subtracted from) other income on the personal Steuererklärung.

AfA, more precisely

AfA, Absetzung für Abnutzung, is the structural tax shield in this picture. The rate depends on the property:

• Two percent per year for residential buildings completed before 1 January 2023. Linear, over fifty years.
• Three percent per year for residential buildings whose construction (Bauantrag) was filed from 1 January 2023 onwards. Linear, over thirty-three years.
• Five percent per year, degressive, for new-build residential property whose construction (Baubeginn) began between 1 October 2023 and 30 September 2029. This is taken on the declining balance, five percent of the building's remaining value each year, so it front-loads the deduction into the early years. You can switch to linear AfA later, once that would give the bigger write-off. For new builds this is now the most-used route, and it stacks with Sonder-AfA §7b.
• Sonder-AfA §7b, where a property qualifies, adds five percent per year for the first four years on top of either the linear or the degressive AfA. Conditions are strict: construction in eligible timeframes, cost caps (currently up to €5,200 per square metre construction cost, depreciable basis capped at €4,000 per square metre), and energy efficiency requirements (EH40 NH or equivalent). The programme currently sunsets at the end of 2029.
• Denkmal-AfA, where a property is officially listed under Denkmalschutz, applies a separate accelerated schedule to the qualifying renovation costs, currently nine percent per year for years 1 to 8, then seven percent per year for years 9 to 12.

Only the building portion is depreciable. Land is not. Allocating purchase price between building and land, usually based on local Bodenrichtwert and either a Gutachten or a standardised method, is a step that materially affects the deductible base.

Why the marginal tax rate is the headline variable

The size of the after-tax benefit is not determined by the AfA rate alone. It is determined by the AfA rate multiplied by the borrower's marginal income tax bracket. A deduction of one euro at a thirty percent marginal rate is worth thirty cents. The same deduction at a forty-five percent marginal rate is worth forty-five cents. The same property, in the hands of two investors at different income levels, produces different after-tax outcomes.

This is the structural reason the property-as-tax-shield conversation lands harder in higher tax brackets. The dry rate of AfA does not change, but the value of it scales with the marginal rate.

What this is not

A few clarifications worth being explicit about, because the rules are sometimes misrepresented in influencer content:

AfA is not a tax credit. It does not directly reduce tax owed; it reduces taxable income, which then reduces tax owed indirectly through the bracket structure.

AfA does not cancel cashflow shortfalls. A property with negative pre-tax cashflow can become positive after-tax for some investors, but it cannot turn a fundamentally broken deal into a good one.

The Werbungskosten deductions are subject to documentation requirements. Receipts, invoices, and loan statements all become part of the Steuererklärung file. Sloppy record-keeping creates real friction with the Finanzamt.

Specific income offset rules apply differently depending on whether the property is held privately or in certain corporate structures, and depending on whether losses are realised or merely accrued. For some structures, paper losses from AfA can offset salary income; for others, they cannot.

What comes next

Tax treatment is one half of the case. The risks, vacancy, regulation, life events, refinancing exposure, are the other half, and they are covered in considerations and risks.