Renovating a Property in Germany: What Can You Depreciate and For How Long?

HGB 255: What Is the Depreciation Rate for Renovations?

In Germany, there is no fixed depreciation rate just for renovation costs. 

If the renovation costs are classified as modernization costs (Herstellungskosten), they have to be depreciated in the same way as the building itself. This is specified in 255 HGB. The logic is that they improve the building as a whole and gradually deteriorate, just as the building itself does, so they should be depreciated similarly.

For example, if you can depreciate 2% of the property's build-up value, you can also depreciate 2% of certain renovation costs. In other words, you would depreciate the cost over 50 years.

If the renovation costs qualify as maintenance expenses (Erhaltungsaufwand), they can, in principle, be deducted immediately in the year they are paid. The reason is that maintenance is needed to keep the building functioning, so it is an immediately needed expense and write-off.

Therefore, this distinction makes a huge difference. In most other countries, the distinction is much more subtle; you depreciate a heating system over its useful life, let's say 10 or 15 years. In Germany, it is either immediate or more like 30-50 years!

We discuss the classification of expenses in detail below. 

If you want to read up more on the depreciation rules of buildings, you can find a detailed description here: German real estate depreciation laws. They range from about 2% to 10%, with the higher rates reserved for high-energy-efficiency new builds that meet special criteria.

255 Abs 2 HGB: What Renovation Costs Can Be Depreciated in Germany?

As outlined above, German tax law distinguishes primarily between maintenance expenses (Erhaltungsaufwand) and modernization costs (Herstellungskosten). Let’s discuss them in detail.

What are Maintenance Expenses (Erhaltungsaufwand)?

Maintenance expenses are costs incurred to preserve or restore a property's original condition. In other countries, that means costs are limited to say repairing a leaking roof, replacing broken windows, or fixing plumbing issues like a broken toilet. These measures maintain usability but do not create a new or significantly upgraded asset.

In Germany, the definition is typically broader. 

Maintenance expenses are costs for maintenance and repairs that are not considered capital expenditure (negative definition). For maintenance expenses, the replaced parts must take over the functions of the previous parts. It is irrelevant whether other materials or a technically different mode of operation are used. Maintenance expenses also apply if the replaced parts were not yet objectively old or technically worn out. 

This rule means that replacing well-functioning single-pane windows with double-pane windows is considered maintenance and can be deducted immediately. And in Germany, deductions are not just from your overall taxable income; hence, even if you have limited rental income. 

Examples of maintenance expenses:

• Cosmetic repairs in the rented flat, such as painting and wallpapering, or floor covering replacement (laying new parquet, laminate, or tiling to replace old flooring)

• Renovation of the façade, including the installation of additional facade cladding for thermal purposes.

• Replacement of a flat roof with a gabled roof, if this merely creates greater room height without expanding the usable area and possible use.

• Enlargement of an existing window.

• Renovation of floors, doors, sanitary facilities, heating, and electrical systems 

• Conversion of a heating system using solid or liquid fuels to a heating system with a heat pump

• Outside Maintenance, such as painting, garden care, and fixing existing pavement or paving stones. 

What are Modernization Costs (Herstellungskosten)?

Expenses qualify as modernization if they are incurred for the extension (Erweiterung)or a substantial improvement (wesentliche Verbesserung) of the property beyond its original condition. 

These may occur if:

• The overall standard of the property is raised.

• Core structural elements are replaced.

• The usable space is expanded.

• The property's technical condition is materially upgraded.

Examples include adding a balcony, converting an unused attic into living space, or comprehensively modernizing several essential building systems at once, such as upgrading the electrical system, replacing the roof, etc.

Such costs cannot be deducted immediately. Instead, they must be capitalized and depreciated over the building’s remaining useful life through annual depreciation (AfA).

Given the degree of ambiguity, when you get to the point of actually deciding on the work, you are well advised to consult with the trades(wo)men and or a tax advisor on the specifics. 

What is the Maximum Immediate Deductible Cost in Germany? The 15% Rule

One of the most important provisions for investors in German real estate that limits the extent to which you can use deductions is the so-called 15% rule under § 6 Abs. 1 Nr. 1a EStG.

The rule means that if the total net expenses for repairs and modernization exceed 15% of the building’s acquisition cost, determined by the principles in 255 abs 1 HGB and excluding the land value, these costs do NOT qualify as maintenance but are automatically classified as acquisition-related modernization costs (anschaffungsnahe Herstellungskosten). 

In other words, they need to be depreciated over the building's life rather than fully deducted in the year of expense, which significantly delays the tax benefit.

The rule applies to expenses incurred within the first three years after acquiring a property. The 15% rule in German real estate is calculated on net amounts (excluding VAT) and applies only to the building portion of the purchase price. The land value is not included.

In practical terms, this means that even typical house maintenance costs in Germany, such as repairing a toilet, may lose their immediate deductibility once the threshold is exceeded.

Because this rule can override the normal distinction between maintenance expenses and modernization costs, it is one of the more critical aspects of your renovation cost in Germany.

What is the Minimum Immediate Deductible Cost in Germany? The 4.000 Euro Rule

While the 15% rule reigns in the rather ample ability to depreciate expenses immediately, there is yet one more specific rule that expands the deductibility:

The 4.000 Euro rule: If the expenses for a single construction measure on a building do not exceed 4.000 Euro (excluding VAT), they are generally considered maintenance (Erhaltungsaufwand). 

Such costs can be deducted in full from tax in the year of payment, rather than being depreciated over decades. This treatment has to be requested. 

Definition of construction project: The limit does not apply to the entire renovation in a year, but rather to each order or project.

§ 82b EStDV: Depreciating Over 2-5 Years Instead of Immediately

German tax law allows you to spread qualifying maintenance expenses evenly over two to five years rather than deduct them in full in the year of payment.

This rule can benefit you if depreciating in one year puts a big dent in your taxable income, thereby considerably reducing the applicable tax rate and the overall tax rebate you get. Spreading the tax deduction over multiple years would then reduce how much tax you would pay at top rates and help you obtain a higher tax refund. 

This option is regulated in § 82b of the EStDV 1955. It applies to buildings that are used predominantly for residential purposes at the time the maintenance costs are incurred. A building qualifies as predominantly residential if more than 50% of its usable floor space is dedicated to living purposes. Garages belonging to the building are generally treated as residential use, provided they do not exceed one parking space per dwelling unit.

Instead of deducting the entire maintenance expense in a single tax year—as would normally be required under general income tax rules—taxpayers may elect to allocate the costs evenly over a period of two to five years. The total deductible amount remains the same; the rule simply spreads the tax impact across multiple years.

If the property is sold during the distribution period, any remaining undeducted balance may be fully deducted in the year of sale. The same treatment applies if the property is transferred into business assets or ceases to generate income. Where a property has multiple owners, all co-owners must apply the same distribution period.

Are Energy Efficiency Measures Tax Deductible?

The bottom line is that most measures are immediately tax-deductible.

In principle, energy efficiency renovations follow the same basic classification principles as other renovation costs in Germany. Their tax treatment depends on whether they qualify as maintenance expenses (Erhaltungsaufwand) or as modernization costs (Herstellungskosten).

Given that most energy efficiency measures replace existing systems, they qualify as maintenance costs and are hence immediately tax-deductible. If the renovation significantly improves the building’s technical standard — for example, through comprehensive insulation upgrades or the installation of a modern heating system — the costs may need to be capitalized and depreciated over the remaining useful life of the property.

For owner-occupied properties, since no rental income is generated against which renovation costs can be deducted, § 35c of the Einkommensteuergesetz (EStG) provides a separate mechanism: a direct income tax reduction for certified energy-efficiency measures. Homeowners may claim 20% of eligible expenses (capped at EUR 40,000 per property) allocated over three years (7% / 7% / 6%). Unlike depreciation (AfA), this incentive directly reduces the final income tax payable rather than taxable income.

The building must be at least ten years old at the start of the works, must be used for the taxpayer’s own residential purposes, and the measures must comply with defined technical efficiency standards confirmed by a certified professional. The tax reduction is excluded when the same costs are already funded through public subsidy programs or when they relate to new construction.

Expert Strategy: How to Plan Renovations Tax-Efficiently

From a purely strategic perspective, the 15% rule is often the decisive factor when you acquire an existing rental property in need of renovation.

In essence, the advice is:
1. When you face significant repairs, you want to prioritize maintenance over modernization.
2. When there are questions about how the renovation might end up being treated, prioritize the renovation work that is more likely to be classified as maintenance.

This way, you are sure you can deduct these expenses immediately.

Additionally:
3. If you expect further repairs in the first 3 years, you want to keep your up-front expenditure below the 15% limit and keep a buffer for these repairs.

Otherwise, you risk having to deduct such repairs over many decades.

Example: You want to buy a property for 200.000 € (excluding land costs) that you can depreciate by 2% per year. You plan to spend 20% in the first year, with 10% for maintenance and 10% for modernization. You also expect to spend another 2% on repairs over the next two years, and you should consider whether you can delay 7% of your modernization expenditure.

Of course, in reality, you need to consider which renovations go hand in hand, but some are quite separate, such as replacing windows, which you could delay. 

      How Best to Spread your Renovation Cost

If maintenance work is necessary and the total cost clearly remains below 15% of the building’s acquisition cost, completing these measures within the first three years can be advantageous. In that case, the costs may remain maintenance expenses and be deducted immediately, improving short-term liquidity.

A common professional approach is to divide renovation measures into two phases:

1. The first phase includes necessary repairs and improvements that may qualify as modernization expenses.

2. The second phase includes larger renovation projects that can be considered replacements of systems. 

3. If there is any ambiguity regarding the classification of modernization projects in later years, try to limit the costs to 4.000 Euros.

4. It is also advisable to set aside a financial buffer for repairs in the first phase.

The key takeaway is simple: renovation timing is not just an administrative detail. Proper timing can be just as important as the renovation itself.

In summary, renovation costs in Germany can either be fully tax-deductible or subject to long-term depreciation, depending entirely on their classification.

For landlords, strategic planning around renovation costs in Germany is essential, as timing directly influences liquidity and long-term tax outcomes. Poor planning, however, may lock capital into decades of depreciation.

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