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Shorter useful life – How faster tax depreciation of real estate can be achieved

Fixed tax depreciation rates based on standardised useful lives mean that real estate users have only limited scope to provide proof of an actual useful life that is shorter. The Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) has set out the conditions under which the local tax offices would accept a shorter useful life.

Privately-held real estate that is rented out and where the development was completed as of 2023 may generally be depreciated at an annual rate of 3%. If the completion was prior to 2023 then a tax depreciation rate of 2% will apply. Old buildings that were constructed prior to 1925 can be depreciated at 2.5%. If the real estate is a business asset and is not used for residential purposes then a standard tax depreciation rate of 3% applies for the construction years as of 1985 (if the start of construction or the purchase was prior to 2001: 4 %). Therefore, by law and depending on the situation, a standard useful life of 25, 33, 40 or 50 years will be assumed. The fixed tax depreciation rates have to be applied irrespective of the actual age of the building. The rates also apply to existing real estate that has been acquired. However, real estate owners have the option of deviating from the standardised tax depreciation rates, within very narrow limits, and providing proof of an actual useful life that is shorter so that the depreciation can be accelerated. The proof has to be provided in the form of an expert appraisal from which it has to be possible to infer the relevant factors for the shorter useful life (e.g. technical wear and tear, commercial devaluation of the real estate or legal restrictions on use). The BMF, in its circular of 22.2.2023 (reference: IV C 3 – S 2196/22/10006 :005) set out when the local tax offices would accept a shorter useful life:

  • There needs to be a definite and specific justification for the actual useful life that is shorter. The owner has to demonstrate that the building will be technically or commercially obsolete before the end of the standardised time periods. A shorter useful life can be acceptable if, for example, the owner is already required to demolish the building.
  • In the case of special factory buildings (e.g. lightweight construction halls) a shorter useful life may already be shown in official German tax depreciation tables. The same will apply to parts of buildings that are standalone immovable capital assets (e.g. shop fixtures).
  • Where there is a limited tenancy, a shorter useful life may be deduced for fixtures added by tenants.
  • The actual useful life will also be affected by the technical wear and tear. For this, an assessment would have to be made, for instance, of the extent to which the supporting structure of the building (especially the walls and the roof) restricts its usability.

Please note: Proof of a shorter useful life has to be provided in the form of an appraisal by either a publicly appointed and sworn expert in the valuation of (un)developed real estate, or by a person who is similarly accredited.

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