The German Federal Government has proposed the introduction of a degressive depreciation (AfA) for newly constructed residential buildings, retroactively starting from October 1st, 2023. This move aims to stabilize the construction and real estate sectors while driving forward housing construction in Germany. The degressive depreciation promotes a significantly faster refinancing of investments, creating incentives for investment that will contribute to stabilizing the construction industry. The degressive AfA complements the increase in linear AfA from two to three percent. In its session on March 22, 2024, the Bundesrat approved a compromise proposed by the mediation committee on the Growth Opportunities Act.
Federal Minister Klara Geywitz stated, “The degressive AfA for residential construction is coming! Deducting five percent of investment costs annually is another step towards revitalizing residential construction in Germany and stimulating the construction of more housing. Our regulation does not set any limits on construction costs. Buildings can be constructed starting from an efficiency standard of 55, and the attractive depreciation applies retroactively to all construction projects commenced between October 1, 2023, and September 30, 2029.”
Background
The construction industry exemplifies several sectors in Germany crucial to the economy, which have seen a noticeable downturn in recent years. This decline stems from various factors, including sharply increased (construction) interest rates and price hikes, limited land availability, material and labor shortages, as well as supply chain issues, all of which have led to many construction projects currently being stalled. The Russian invasion of Ukraine further complicated economic conditions.
The Federal Government has already taken targeted measures to revive the housing construction sector. A mix of effective, innovative, and long-term incentive programs supports the creation of affordable and environmentally friendly housing. The approved federal-state pact for planning and approval acceleration is underway. Additionally, there’s a comprehensive package of measures for additional investments in the construction of affordable and climate-friendly housing and for the economic stabilization of the construction and real estate sectors. The degressive AfA is one of the central measures in this package, initiated with the Growth Opportunities Act.
Implementation of Degressive AfA
The Federal Cabinet had already passed the Growth Opportunities Act on August 30, 2023. The degressive depreciation on wear and tear (AfA) for residential buildings is a key component of this law. Delays occurred because the Bundesrat had referred this matter to the mediation committee on November 24. Finally, on March 22, 2024, the Bundesrat approved a compromise proposed by the mediation committee, paving the way for the Growth Opportunities Act and the degressive AfA.
Key Points about Degressive AfA
- The degressive depreciation applies exclusively to newly constructed or acquired residential buildings and apartments.
- In the first year, five percent of the investment costs can be claimed for tax purposes. In the following years, five percent of the residual value can be claimed for tax purposes.
- Switching to linear AfA is possible.
- The construction of the residential building must commence between October 1, 2023, and September 30, 2029 (6-year period).
- For the first time, the decisive criterion for granting degressive AfA is not the building permit but the indicated start of construction. This aims to incentivize the implementation of projects that have been planned but not yet started due to various reasons such as financing issues. This approach also aims to reduce the backlog of more than 800,000 approved housing units.
- In the case of property acquisition, the contract must be concluded between October 1, 2023, and September 30, 2029. The property must be acquired by the end of the year of completion.
- The degressive AfA can be combined with the special depreciation for new rental housing construction. This benefits new buildings with the EH40/QNG energy-efficient building standard, adhering to a construction cost ceiling of €5,200 per square meter.
- The conditions for the aforementioned special depreciation for new rental housing construction have been further improved with the Growth Opportunities Act: the application period for new cases has been extended until the end of September 2029, the construction cost ceiling has been increased from €4,800 to €5,200 per square meter, and the eligible production/acquisition costs have been raised from €2,500 to €4,000 per square meter.
Conclusion
The approval of a 5% degraded subsidy for new energy-efficient buildings in Germany represents a significant step towards revitalizing the construction sector and promoting sustainable housing development. By providing tax incentives, the government aims to stimulate investment in housing construction, address housing shortages, and contribute to environmental goals. The implementation of the degressive AfA, alongside other supportive measures, is expected to foster growth in the construction industry and pave the way for a more resilient and sustainable future.
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