Why buying to let makes so much sense in the German housing market

Germany has a few unusual provisions that make being a landlord financially beneficial, including not paying capital gains tax while also reducing your tax burden. There are also other factors that can tip the scale, such as whether you live in a rent-controlled apartment.

Let’s take a look at which is better in Germany: buying a home for yourself or a rental property? Here are the factors to consider:

1. Avoiding all capital gains tax

Germany has a unique offer for landlords: when you hold an investment property for more than 10 years, you are exempt from paying the 26,375% capital gains tax. This rule applies whether you sell the property while living in Germany or after moving abroad.

If you live in the property yourself, this capital gains tax exemption kicks in after two to three years.

The takeaway

You should keep your rental property for at least 10 years, whether you live in Germany for the whole period or not. If you are an owner-occupier, it is still recommended to hold it for longer to recoup the relatively high transaction costs and earn a good return.

This means that while tax savings are a great reason to invest in real estate, they don’t necessarily tip the scale in favour of renting it out compared to living in it.

2. Lowering your tax burden

When buying a rental property in Germany, one of the most powerful yet often overlooked benefits is real-estate depreciation, known as Absetzung für Abnutzung (AfA). This tax rule allows you to deduct part of your property’s value over time from your taxable income. This uniquely German feature can make a massive difference to your bottom line.

In simple terms, depreciation lets you write off the cost of the building (but not the land) over its useful life. What makes it especially attractive? You can apply the depreciation against any type of taxable income, not just rental income. This means that even if your rental is operating at a loss, depreciation can still reduce your tax bill significantly.

The takeaway

For about the first 15 years, a rental property is mostly beneficial from a tax perspective, due to the money you get back from the tax office. After that, the revenue typically exceeds the costs.

But, you can make a rental property more attractive for even longer by using one or more of the following strategies:

• Using a special depreciation allowance (see below): This is a “killer” solution in terms of reducing your tax burden
• Refinancing with a cash-out mortgage: This keeps your interest costs high (and deductible) while freeing up capital to invest elsewhere. 
• Sell the property to your spouse: Believe it or not, the depreciation allowance resets!

In short, holding a rental property for around 15 years already makes a lot of financial sense, but with a few smart solutions, it can become even more profitable.

3. Special depreciation programmes

Normal depreciation rules allow for 2-3% of depreciation annually. But special programmes accelerate the depreciation. These benefits make extraordinary returns possible, especially for high-income earners. With the recent changes, you can now deduct about 50% of a new rental property's value from taxes after ten years.

How much is the special depreciation?

• For new rental properties that complete between October 1, 2023 and September 30, 2029, you can opt for an accelerated depreciation of 5%.
• In addition, you can get an extra linear depreciation of 5% over 4 years for properties that meet the high energy efficiency standard EH40/QNG+ and have an upper construction cost limit of 5.200 euros per m².

The takeaway

Use a mortgage advisor to help find rental properties that both meet these standards and have good rental and appreciation prospects. Then compare to the alternative of buying for yourself.

4. Rent control

If you live in an apartment that is rent-controlled, moving into your own home may not be so attractive. Buying a rental property allows you to climb the property ladder while keeping your rent benefits.

The takeaway

Living in a rent-controlled apartment makes buying a rental property attractive.

5. Financing terms

Costly financing terms would, in many countries, undermine the case for renting. In Germany, however, financing terms for rental properties are as favourable as those for personal homes.

The takeaway

Financing conditions are typically no reason to forgo buying a rental property. If you want to buy your own property, you are well advised to consult a specialist, as the conditions some banks apply may delay or accelerate the purchase of your own home.

Who benefits most from a rental property?

If you fit one of the following profiles, you are most likely to benefit from a rental property:

• Cash-poor investors: If your savings are limited and you cannot afford to buy your own home, investing in a smaller rental property can maximise the return on your savings and give you early exposure to the property market. 
• High-income investors: If you are a high-income earner, then a new high-depreciation rental property can provide you with significantly additional income. The extra cash flow can offset part of your own rent or might accelerate your ability to afford a home for personal use.
• Asset-rich investors: If you have substantial savings but worry about overexposure to the stock market, investing in rental property can be a compelling alternative to bonds and stocks, as it offers higher expected returns (for higher-income investors) and diversifies your risk.
• Older home buyers: If you are an older home buyer, you may find that banks require a very high monthly repayment for the type of home you desire for yourself. Investing in a rental property instead might then be a more viable option.