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Certified Tax Advisor, Manager, Tax & Legal
Anyone who builds new residential property within the European Union can benefit from the special depreciation allowance under Section 7b of the German Income Tax Act (EStG). According to this, up to 5 % of the assessment basis can be deducted in addition to the regular depreciation allowance in the year of acquisition or construction and in the following three years. In its decision of August 12, 2025 (case no. IX R 24/24), the German Federal Fiscal Court (BFH) had to decide whether the special depreciation allowance should also be granted if a single-family home was first demolished and then replaced by a new building.
In the case in dispute, the taxpayer owned an older single-family house that was rented out. Although the house was still functional, it was in need of renovation, so she decided to demolish it. Immediately afterwards, she had a new single-family home built, which she again rented out as living space. She therefore claimed in addition to the regular depreciation allowance the special depreciation allowance under Section 7b EStG as income-related expenses on her rental income; the tax office rejected the latter. The appeal proceedings and the lawsuit in the fiscal court were unsuccessful.
The tax relief provided in Section 7b EStG requires, in particular, that the construction project creates “new, previously non-existent” apartments, which can only be assumed if additional or increased housing stock has been created compared to the previous situation. This does not necessarily follow from the wording of the provision. From a linguistic point of view, any dwelling that did not exist as such prior to the construction project is a “new, previously non-existent” dwelling. However, the special depreciation allowance under Section 7b EStG was introduced in 2019 primarily for non-tax incentive purposes. The legislator’s aim was to create tax incentives for the increased construction of new rental apartments. Consequently, the construction project to be promoted for tax purposes must contribute to increasing the housing stock and not merely replacing it.
The criterion of a “new, previously non-existent” dwelling may exceptionally be met if the demolition is not objectively or temporally related to the new construction. In the case in dispute, however, the taxpayer had already made a decision to build a new building at the time of demolition, as evidenced by the building application submitted. In addition, the new construction project followed immediately after the demolition. The economic reasons for the decision to demolish in connection with the alternative option of renovating the old house are irrelevant.
According to these criteria, the taxpayer did not create a previously non-existent apartment but merely replaced an existing apartment. Consequently, the requirements for special depreciation under Section 7b EStG were not met.
Notice:
The decision provides clarity with regard to the “novelty” of a dwelling as an essential criterion for the applicability of the special depreciation allowance under Section 7b EStG. The decision is in line with the original legislative rationale, according to which the dwelling should not only be created “for the first time” but also “additionally” in order to counteract the housing shortage. Thus, construction measures that merely result in a relocation of living space or an expansion of the living space within a building do not meet the requirements of Section 7b EStG. The replacement of the previous property may be eligible for tax relief if a two-family or multi-family house is built in place of the previous single-family house.