Shortened Real Estate Depreciation: Reducing the Remaining Useful Life with Expert Opinions for Higher Depreciation (AfA)

Reducing Remaining Useful Life Through Expert Opinions

The possibility of determining a useful life shorter than the standard useful life through expert opinions is no secret and is explicitly mentioned and essentially offered as an option in relevant legal texts.

According to court rulings, it is not necessary to prepare complex, highly individualized reports for this purpose. Model-based remaining useful life assessments are permissible according to the Cologne Fiscal Court (Case No. 6 K 923/20).

“Any method of presentation that appears suitable in the specific case can be used,” stated the Federal Fiscal Court in 2021 (Case No. IX R 25/19).

The expensive building substance reports often requested by tax authorities are therefore not necessary.

Online reports and limiting the assessment purely to the useful life are also permissible.

Nevertheless, attempts to reduce the useful life are not always recognized by tax authorities, at least not initially.

It is then necessary to follow up and work with the expert to achieve the desired outcome.

Efforts in the Federal Council to Make Reducing Remaining Useful Life More Difficult

The 2021 decision by the Federal Fiscal Court, which made it relatively easy to reduce the remaining useful life, is not welcomed by everyone.

A draft law is pending in the Federal Council, aiming to significantly complicate such assessments. See page 38: https://www.bundesrat.de/SharedDocs/drucksachen/2024/0301-0400/369-1-24.pdf?__blob=publicationFile&v=1

The draft proposes that a shortened useful life should only have tax implications if it is less than a staggering 20% of the standard useful life.

Whether this significant disadvantage for property buyers will take effect remains to be seen. We do not believe it will pass in this form. Particularly the “valid for tax purposes only if under 20% of the standard useful life” rule seems likely to be overturned by courts as disproportionate.

Here is a quote from the draft law linked above: “In current taxation practices, it has become evident that any report (even by non-official experts, other individuals, or simple ‘internet reports’) is accepted as evidence, turning the exception into the rule. To counter this …”

Not Always Positive: Depreciation Increases Capital Gains

A rarely considered and potentially negative consequence of depreciation (AfA) in real estate is that, in the case of a taxable property sale — such as a sale within 10 years of purchase without further tax-relieving circumstances — the depreciation already claimed reduces the property’s value and thus increases the capital gain and, consequently, the tax burden.

Example of Increased Tax Due to Depreciation in a Sale

The purchase price of the property, including land, was €500,000, of which €350,000 was allocated to the building. The property is sold after seven years for €650,000.

The building was depreciated at 2% per year for seven years. The sales proceeds are now not €650,000 – €500,000 = €150,000. Due to the depreciation of 7 x 2%, the building lost 14% of €350,000 = €49,000 in value. This increases the gap between purchase price/value and selling price, i.e., the gain.

The sales proceeds are now €650,000 – (€500,000 – €49,000) = €199,000. Instead of €150,000, €199,000 must be taxed as sales proceeds.

Such a situation should ideally be avoided, as it means missing out on opportunities for tax optimization in real estate sales.

If a taxable sale must occur, the above effects of AfA should be considered in the planning phase.

Tax Advantage in Real Estate: “Profit” (Tax Savings Through AfA) Is Also Freely Retained in Tax-Free Sales

The issue described earlier regarding taxable early sales illustrates another tax advantage in real estate:

In an early sale, the economic advantage of AfA is effectively reversed. Initially, tax savings are achieved through building depreciation.

However, when the property is sold before the speculation period, the book loss of the building becomes a book gain. The depreciation claimed is deducted from the purchase price, increasing the sales proceeds and, consequently, the tax liability.

However, if the speculation period is observed, both the direct gain from the sale price minus the purchase price and the tax gain through AfA are excluded and are not taxed as book gains.

Standard Useful Life Assessments at Meine-Renditeimmobilie

At Meine-Renditeimmobilie, we have experience with useful life assessments and regularly commission them for our clients.