How to reduce income tax in Germany via property investment
Property is always a good investment, but Germany's stable property market and booming international cities such as Berlin make it an especially appealing location for investors.
On top of this, with the new Growth Opportunities Act passed in 2024, the German government is making it easier and more attractive for private investors to invest in property and generate extra income.
Investment property specialist First Citiz is a leading investment advisory company based in Berlin that can provide you with guidance on how to make a profitable and balanced investment in the German property market.
Understanding accelerated depreciation
This means that you can use everyday wear and tear on a building to write off a portion of its value each year (typically between 2 and 3 percent excluding land value). You can then deduct this depreciation from your taxable income, potentially saving you big on your tax bill.
Under the new rules, any building constructed between October 1, 2023 and September 30, 2029, can benefit from accelerated depreciation of 5 percent per year instead of the usual 3 percent linear depreciation.
Accelerated depreciation as a major investment benefit
Wondering how this translates into something tangible that you can benefit from?
For example, if you buy a property with a value of 400.000 euros (excluding land), and the linear depreciation is 3 percent, you could deduct 12.000 euros off your taxable income each year (for up to 50 years, depending on when the property was built).
With accelerated depreciation, you get a higher percentage discount of 5 percent per year. That’s 20.000 euros in the first year. In the following years, 5 percent of the remaining value is discounted. Over 6 years, you could accumulate approximately 106.000 euros in deductions from your taxable income. If you are in the highest tax bracket, which is 42 percent, that’s 44.500 euros of income tax saved over six years - a total game changer for your investment profitability!
KfW subsidy for property investors
They are specifically intended for climate-friendly new builds, such as Efficiency House 40 properties, helping investors reduce overall financing costs and create rental housing while improving the property’s long-term value. Expats can also benefit from these funding programmes to help them finance their investment property at lower rates.
In addition, a lower-interest subsidised loan from KfW may reduce the main bank’s risk and strengthen your loan-to-value profile. Lastly, as the owner of a rental property, you can deduct the interest paid on both your KfW and bank loans as income-related expenses for tax purposes.
Combine strong investment fundamentals with tax benefits
Investing in newly built property in Germany has become an extremely interesting prospect. However, you should always keep an eye on investment fundamentals. Before going ahead with a purchase, it's always best to consider the quality of the property, the rental demand, the energy class and the location.
First Citiz's investment specialists recommend targeting central locations in large, international cities. These areas are incredibly sought after, and strong rental demand helps maintain high rental yields and occupancy rates close to 100 percent in Berlin.
In addition, long-term profitability is highly predictable in prime locations. When selling the property, you can expect strong capital appreciation and international demand. Properties in non-prime locations may offer slightly higher yields or tax advantages upfront but often come with greater resale risk and lower prices. Reviewing current Berlin property prices can help investors more accurately compare prime and emerging locations before committing to a purchase.
According to First Citiz’s advisors, the capital gain on resale is the primary driver of a property investment in Germany, as it’s tax-free after just 10 years of ownership.
Today, the best investment strategy in Berlin is to take advantage of the new tax benefit while keeping long-term fundamentals such as central location, rental demand and energy efficiency.
Investors who want to compare different locations and asset types can review properties for sale in Berlin to better understand available investment options before choosing the right strategy.
Case in point: The Garden Living
The rental demand there is huge, and as a new-build property, it is exempt from Berlin’s rent cap. The outstanding A+ energy class protects investors from future regulatory changes for the next 50 years! On top of that, it has optimised floor plans, customizable fittings, and balconies. With the accelerated depreciation, it’s simply one of the best investment properties in Berlin.
The area also sits close to Friedrichshain, where apartments in Berlin Friedrichshain remain attractive thanks to strong rental demand, lifestyle appeal and long-term resale potential.
As these tax incentives apply only to apartments built between October 2023 and September 2029, new builds are likely to become increasingly attractive to investors. Now is the time to pick the right property, lower your income tax in Germany and optimise your asset portfolio!