Rental property tax benefits in Germany: what you can deduct, and what you still pay

A rental property in Germany can reduce your tax bill, but usually by less than a sales pitch suggests. Mortgage interest, running costs and depreciation on the building are deductible against rent. Loan repayments, the land and money paid into the building's reserve are not, or not yet. A deduction also reduces taxable income, not the tax itself. It returns your marginal tax rate on each euro, never the euro itself.

This guide covers ordinary long-term residential letting, with a worked example that keeps cash flow and taxable income apart. Furnished short-term lets, letting to relatives below the local market rent (§ 21(2) EStG) and company ownership follow different rules.

Rent is income from letting and leasing (Einkünfte aus Vermietung und Verpachtung) under § 21 EStG, declared each year on Anlage V of the income-tax return. Our Anlage V checklist covers the records you will need.

The taxable figure is rent minus income-related expenses (Werbungskosten), the costs of earning and maintaining that income (§ 9 EStG). The result is added to your other income, such as salary, and taxed at your personal rate. If it is negative, a German resident can generally offset the loss against other income in the same year. Most "tax benefit" claims rest on that offset.

A German mortgage is usually an annuity loan (Annuitätendarlehen): a fixed monthly payment combining interest and repayment (Tilgung).

• Interest is deductible (§ 9(1) sentence 3 no. 1 EStG) to the extent the loan financed the rental property.
• Repayment is not deductible. It reduces your debt; it is saving, not a cost.
• Financing costs, such as notary and land-registry fees for the bank's land charge (Grundschuld), are generally deductible when paid.

Over time each payment shifts from interest towards repayment, so the same payment produces a smaller deduction every year.

Two rules catch many first-time buyers.

The 15% rule. Renovation within three years of purchase that costs more than 15% of the building's acquisition cost, excluding VAT, becomes part of the building's cost (anschaffungsnahe Herstellungskosten, § 6(1) no. 1a EStG, applied to rentals by § 9(5)). You depreciate it instead of deducting it at once. Routine annual maintenance is excluded. Budget any renovation with this rule in mind before you buy.

The WEG reserve. Part of your monthly Hausgeld, the payment to the owners' association (WEG), funds the maintenance reserve. It becomes deductible only when the association spends it on maintenance, as the Federal Fiscal Court confirmed in January 2025 (BFH IX R 19/24).

Depreciation (Absetzung für Abnutzung, AfA) spreads the building's cost over its assumed life. It is a deduction with no payment that year, because you paid at purchase.

Only the building depreciates, so price and purchase costs are split between land and building. The purchase contract's split is the usual starting point, but the tax office can challenge one that does not reflect real values. Where land is expensive, the depreciable share is smaller. The Federal Fiscal Court has held that the Finance Ministry's calculation aid cannot simply replace a contractual split (BFH IX R 26/19).

For residential buildings held privately, § 7(4) EStG sets these straight-line rates:

Newer and listed buildings can qualify for more, under narrow conditions:

• Declining-balance depreciation of 5% of the remaining book value (§ 7(5a) EStG) where construction started, or the purchase contract was signed, between 1 October 2023 and 30 September 2029, and a buyer acquires by the end of the completion year.
• Special depreciation of up to 5% a year for four years (§ 7b EStG) for new rental housing meeting cost caps, the Effizienzhaus 40 standard with sustainability certification, and a ten-year letting requirement.
• Listed buildings and redevelopment areas (§ 7h and § 7i EStG): up to 9% a year for eight years, then 7% for four, on certified qualifying construction costs only.

None applies automatically. A resale flat in a 1990s building uses 2%. If a property is marketed on its depreciation, ask which rule applies, to which cost base, and whether the price already reflects it.

The tax saved equals the deduction multiplied by your marginal rate, the rate on your last euro of income. For 2026, a single filer's marginal income-tax rate reaches 42% at €69,879 of taxable income and 45% at €277,826 (§ 32a EStG). At €35,000 it is about 29%. Joint assessment for married couples roughly doubles these thresholds, and solidarity surcharge and church tax, where they apply, add to the rate.

Your tax class (Steuerklasse) only sets how much your employer withholds each month. It does not set your final tax or your marginal rate.

Illustrative example. Fictional figures, not a real property, offer or forecast.

Inputs

• Resale apartment in a building completed in 1995. Purchase price €220,000.
• Purchase costs assumed at 8% (transfer tax, notary, land registry, no agent fee): €17,600.
• Land share assumed at 25%. Depreciable building cost: €178,200. AfA at 2%: €3,564 a year.
• Loan of €200,000 at an assumed fixed rate of 3.6% with 2% initial repayment: €933 a month, €11,200 a year. This is an assumption, not a live offer. Equity: €37,600.
• Cold rent (Kaltmiete) of €800 a month under the existing lease.
• Operating costs recharged to the tenant are assumed to net to zero and are left out of both columns.
• First full calendar year, with the loan starting on 1 January.

The apartment costs €3,980 a year before tax, or €332 a month. The tax loss is only €2,874: repayment and the reserve leave your account without being deductible, while depreciation is deductible without leaving it. What that loss is worth depends on the owner:

Income tax only, calculated with the 2026 tariff. Solidarity surcharge and church tax are excluded.

The deduction does not refund the shortfall. Owner A receives the larger saving and still funds more than two-thirds of the shortfall personally.

Timing. The saving normally arrives after the year ends, with your tax assessment. Until then you fund the full €332 a month. Some employees can instead receive the relief through lower monthly withholding, with restrictions around the purchase year. The saving is the same; only the timing changes. See how the Lohnsteuerermäßigung works.

Wealth. The €4,070 of repayment reduces your debt. That builds wealth only if the property holds its value, and it does not make a negative cash flow positive.

On the same assumptions, year-ten interest falls to about €5,580 while repayment rises to about €5,620. With rent and costs flat, the tax loss shrinks to about €1,324, and Owner A's saving falls from €1,207 to about €556. The payment and pre-tax shortfall do not change. Any rent increase moves the result towards a taxable profit sooner.

• Tax on rental profit at your marginal rate, once interest and depreciation no longer exceed net rent.
• Purchase costs with little relief in year one: the building share is depreciated slowly, the land share never.
• Tax on a sale within ten years. Such a gain is generally taxable (§ 23(1) no. 1 EStG), and depreciation claimed reduces the cost used to calculate it (§ 23(3) sentence 4 EStG). Part of the earlier saving can return as a larger taxable gain.

German rent stays taxable in Germany if you live abroad (§ 49(1) no. 6 EStG). Non-residents deduct only expenses linked to German income, and the basic tax-free allowance is not granted in the usual way (§ 50(1) EStG). A rental loss has little immediate value without other German-taxed income. Your country of residence may also tax the rent, depending on its treaty with Germany, so take advice in both countries.

Tax is the last test, not the first. A generous deduction can still come with a poor investment if:

• the price is high relative to achievable rent, so the pre-tax shortfall is large;
• the plan relies on a marginal rate you may lose after a job change, parental leave or a move abroad;
• a special depreciation claim depends on conditions you may not meet;
• the building needs work the WEG reserve cannot cover.

If the numbers only work because of the tax effect, look again at the price. Waiting, keeping cash or choosing another investment may fit better. For the full monthly budget, including vacancy and repair reserves, see how to calculate rental property cash flow.

Is my whole mortgage payment tax deductible? No. Only the interest, to the extent the loan financed the rental property. Repayment is not deductible.

Does my tax class affect the tax benefit? No. Tax class only affects monthly salary withholding. The value of a rental loss depends on your marginal rate in the annual assessment.

Can a rental loss reduce the tax on my salary? For German residents, generally yes, in the same year. The relief arrives with your annual assessment, or earlier through an approved payroll allowance, which may exclude the purchase year.

Is a new-build apartment better for tax purposes? Buildings completed from 2023 depreciate at 3% rather than 2%, and some qualify for more. Compare price and rent first: a larger deduction on a higher price can still leave a larger shortfall.