Tax Benefits of Buying an Investment Apartment in Germany (2025 Guide)

If you’re considering real estate investment in Europe, Germany is one of the most attractive destinations. With a strong economy, stable property market, and investor-friendly policies, buying an apartment for investment purposes in Germany offers not only rental income but also substantial tax benefits. In this comprehensive guide, we’ll explore how property investors can legally reduce their tax burden, increase returns, and build long-term wealth through real estate in Germany.

Why Invest in German Real Estate?

Germany boasts one of the most resilient property markets in the world. Despite economic fluctuations, real estate in cities like Berlin, Munich, Frankfurt, and Hamburg continues to appreciate steadily. Here are a few reasons why international and local investors are buying apartments in Germany:

• Stable rental demand in urban areas
• Relatively low property prices compared to other Western European countries
• Strong legal protections for property owners
• Attractive financing options from German banks
• Tax incentives for property investors

Key Tax Benefits of Buying an Investment Property in Germany

When you purchase an apartment in Germany for rental income (not for self-use), several tax deductions and incentives become available. These can significantly reduce your taxable income.

1. Depreciation (Abschreibung)

One of the biggest tax advantages is property depreciation.

• What is it? You can deduct a portion of your property’s value (excluding land) each year as a depreciation expense.
• How much? Generally, 2% per year over 50 years for buildings built after 1925; 2.5% over 40 years for those built before 1925.
• Benefit: This non-cash expense lowers your annual taxable income, reducing the tax bill.

💡 Example: If your property (excluding land) is valued at €200,000, you can deduct €4,000 every year as depreciation.

2. Interest on Mortgage Loans

If you finance your property with a loan, the interest paid on the mortgage is fully tax-deductible as a business expense.

• Applies to both local and foreign investors
• Can significantly reduce your rental profit on paper
• Encourages leveraging instead of buying with full cash

3. Operating and Maintenance Expenses

All costs related to managing, maintaining, and operating your rental apartment are tax-deductible.

Examples of deductible costs include:

• Property management fees
• Repairs and renovations (non-capital improvements)
• Utilities (if paid by the landlord)
• Insurance
• Advertising for tenants
• Travel expenses for property visits

These deductions further lower your net rental income subject to taxation.

4. Notary and Legal Fees

The purchase-related costs like notary fees, legal advice, and registration fees can be written off against your rental income—either as immediate deductions or over time.

While you can’t deduct Grunderwerbsteuer (property transfer tax) directly, it becomes part of the property’s cost base and contributes to depreciation.

5. Renovation and Modernization Incentives

Germany allows certain renovation costs to be fully or partially deductible—especially if they are for energy efficiency or improving the building structure.

If you renovate the apartment within the first 3 years and costs exceed 15% of the purchase price, the renovation may need to be depreciated over several years instead of being fully deducted in the first year.

However, energy-efficient renovations may qualify for additional tax credits or incentives under newer environmental laws.

6. No Capital Gains Tax After 10 Years

One of the most attractive tax benefits in Germany is the capital gains tax exemption after 10 years.

• If you hold the investment apartment for at least 10 years, you pay zero capital gains tax when selling it—even if the property has doubled in value.
• This long-term strategy is highly popular among real estate investors aiming for wealth accumulation.

Additional Considerations for Foreign Investors

Germany welcomes foreign property ownership, and the tax benefits are available to both residents and non-residents. However, it’s crucial to understand:

• You may need to declare your German income in your home country depending on tax treaties.
• Non-residents must file a German tax return for their rental income.
• Hiring a German tax advisor (Steuerberater) is highly recommended for compliance and optimization.

Tax Rates on Rental Income in Germany

Rental income is subject to progressive income tax (Einkommensteuer) ranging from:

• 14% (starting rate)
• Up to 45% (for very high incomes)

Add a 5.5% solidarity surcharge (Solidaritätszuschlag) on the tax, and possibly church tax (if applicable).

💡 However, after applying deductions (mortgage interest, depreciation, costs), your taxable income may be significantly reduced—sometimes even zero or negative in the early years.

VAT (Value-Added Tax) Considerations

Residential rentals are generally exempt from VAT. However, if you rent for short-term commercial use (like Airbnb or furnished corporate lets), VAT might apply.

Consult a tax professional if you’re planning short-term rentals, as the rules vary.

Inheritance and Wealth Tax Implications

While Germany has an inheritance tax, property passed on to heirs can benefit from large exemptions if kept for a certain period.

There is no annual wealth tax in Germany currently (as of 2025), although political discussions occasionally revisit this issue.

Real-Life Scenario

Imagine an investor buys an apartment in Leipzig for €250,000 (building value: €200,000, land: €50,000), and rents it for €1,000/month:

• Annual rental income: €12,000
• Depreciation (2% of €200,000): €4,000
• Interest on mortgage: €3,500
• Other costs: €2,000

Taxable rental income:
€12,000 – (€4,000 + €3,500 + €2,000) = €2,500

The actual cash flow is positive, but taxable income is much lower, reducing the income tax owed significantly.

Conclusion: Tax-Efficient Wealth Building Through Real Estate in Germany

Buying an investment apartment in Germany isn’t just about generating rental income—it’s also about leveraging the German tax system to build long-term, tax-efficient wealth.

From depreciation and interest deductions to long-term capital gains exemptions, the system is designed to encourage stable investment in the housing market.

Whether you’re a German resident or a foreign investor, understanding and applying these tax benefits of buying investment property in Germany can dramatically increase your returns and help secure your financial future.