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Purchase price allocation when buying real estate: How to optimize your tax depreciation (AfA)

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Purchase price allocation when buying real estate: How to optimize your tax depreciation (AfA)

When buying a property, many buyers initially focus on location, price, and financing. However, one important tax factor is often underestimated: the correct allocation of the purchase price between land and building. Especially with a detached house with a garden, this allocation can have a significant impact on your tax advantages.

For tax depreciation – the so-called AfA (depreciation allowance) – only the building's value counts. The land value is not considered for tax purposes. Making the right decisions early on can lead to significant tax savings in the long run.

Why the purchase price allocation is so crucial for tax purposes

When purchasing real estate, legally both the land and the building on it are bought. However, these two components are treated differently for tax purposes.

The building depreciates in value over time and can therefore be depreciated for tax purposes. The land, on the other hand, is considered to retain its value permanently and is not depreciable.

This means that only the portion of the purchase price attributable to the building can be claimed for tax purposes under the depreciation allowance.

If the purchase price allocation is not clearly defined in the purchase agreement, the tax office will make the allocation itself. In many cases, however, this assessment is rather unfavorable for the buyer, as the land share is set comparatively high. This automatically reduces the depreciable value of the building.

The result is lower annual depreciation – and therefore a smaller tax advantage.

Especially with rented properties, an unfavorable allocation can cost several thousand euros in tax effects over many years and significantly reduce the return on the property.

The purchase price allocation should be stipulated in the purchase agreement.

To avoid tax disadvantages, it is advisable to clearly define the purchase price allocation in the notarized purchase agreement. If the purchase agreement clearly defines what portion is attributable to the land and what portion to the building, the tax office generally accepts this allocation – provided it is plausible and comprehensible.

A proper allocation is based, among other things, on the following factors:

Standard land value for the location
Condition and year of construction of the building
Size and features of the property
Market values of comparable properties

The better these factors are documented, the lower the likelihood that the tax office will later question the allocation.

Which methods are used for the purchase price allocation

Different valuation methods exist for determining a realistic division.

Previously, the so-called residual value method was frequently used. This involves first determining the land value and then subtracting it from the total purchase price. The remaining amount is then considered the building value. However, this method is now only accepted to a limited extent by many tax offices, as it often inadequately reflects actual market conditions.

The market value method is now much more common. In this method, the land and building are each valued separately and then compared to each other. This results in a significantly more realistic and legally sound allocation of the purchase price.

Why many buyers are missing out on tax advantages

In practice, many property buyers leave the allocation of the purchase price entirely to the tax office. As a result, they often unknowingly forgo potential tax advantages.

Especially with long-term rental properties, an optimized allocation over the years can make a significant difference in the tax burden.

Important questions before buying real estate

Before signing a purchase agreement, you should check a few key points. Careful preparation can prevent later tax disadvantages.

Is the purchase price allocation clearly regulated in the purchase agreement?
Do the standard land value and building value reflect the actual market conditions?
Can an independent expert opinion be useful to document the division?

A professional appraisal can help create a well-founded and comprehensible valuation. This not only creates transparency but also reduces the risk of later disputes with the tax office.

Conclusion: Plan the purchase price allocation strategically early on.

The allocation of the purchase price between land and building is an important tax factor when buying real estate. It significantly determines the amount of your annual depreciation.

Those who address this topic early on and sensibly define the purchase price structure in the notarized contract can optimize their tax advantages in the long term.

Especially in the case of single-family homes with land, it is therefore worthwhile to carefully examine the purchase price allocation and, if necessary, to involve expert support.