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New special depreciation for rental housing construction

In many regions of Germany, the scarcity of affordable housing is becoming an ever more urgent issue. In 2019, a new Section 7b of the Income Tax Act [Einkommensteuergesetz, EStG] introduced special depreciation for the acquisition or construction of new rented dwellings and, still in the same year, this was extended to the 2018 assessment period. In a circular, the Federal Ministry of Finance [Bundesministerium der Finanzen, BMF] has explained details on the application of Section 7b.

Subject matter of the amendment

Subsidies will be provided for new dwellings for which the applications for building permits were filed between 31.8.2018 and 1.1.2022. Under Section 7b EStG, in the year of acquisition or construction and in the following three years it will be possible to make use of special depreciation of up to 5% of the assessment base in addition to the depreciation under Section 7(4) EStG. The special depreciation is applicable to the acquisition or construction of new dwellings in Germany, foreign countries within the EU and in other countries that permit the conditions described here to be verified.

Upper limit for construction costs

The upper limit for construction costs is € 3,000 per sq m of living area (Section 7b(2) no. 2 EStG). Subsequent acquisition or construction costs that arise in the first three years following the year of acquisition likewise have to be included. If the construction costs per sq m of living area turn out to be higher then the subsidy will cease to apply entirely.

Please note: The assessment base for special depreciation is lower; it is limited to a maximum of € 2,000 per sq m of living area.

Usage solely for residential purposes

The dwelling has to be intended for rental to third parties in return for payment. It can be rented out privately or commercially. Self-usage or making the dwellings available for use for no consideration or at a large discount would make them ineligible for special depreciation.

A building can be used for residential purposes if it is intended for this and provides people with appropriate accommodation for a permanent place of residence. Therefore, holiday home rentals, boarding houses and the like cannot be used for residential purposes.

Dwellings that are made available for use by employees can benefit from the concession (e.g. dwellings for caretakers, specialist staff, for members of a company fire brigade and for other persons in the event that, for operational reasons, they have to be constantly on standby directly on the business/factory premises).

A 10-year period has to be observed

The dwelling that benefits from the concession has to be used for residential purposes, as described, in the year of acquisition or construction and in the following nine years. The claimant of the special depreciation allowance has to provide proof every year that the requirements are being met and, indeed, even if the building is sold within this time period. In such a case, the beneficiary would have to provide proof that the purchaser is renting out the dwelling that benefits from the concession to a third party for residential purposes.

Reversal of special depreciation

The special depreciation will have to be reversed if, during the period of mandatory designated use (10 years), the dwelling or building with dwellings that benefits from the concession is sold and the sale proceeds are not taxable. This could be the case, e.g., property held in private assets for a long time into which a dwelling that benefits from the concession has been otherwise integrated.

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