Newly built residential properties as an investment: Using tax benefits and subsidies effectively

The German residential property market remains under pressure: for years, too few homes have been built, particularly in urban areas. At the same time, construction costs, financing costs, and regulatory requirements continue to rise. At first glance, purchasing real estate may therefore appear less attractive to many private investors.

However, newly built properties still offer compelling opportunities—especially when government subsidies and tax-optimization strategies are used effectively.

Why does the government provide strong tax incentives for new builds?

Germany is facing a structural housing shortage. To encourage private investment in residential construction, lawmakers rely on a combination of:

• tax depreciation allowances,
• subsidized low-interest loans, and
• additional incentives for energy-efficient construction.

These measures pursue a clear objective: to accelerate the construction of rental housing that meets modern standards. For investors, this means that a significant portion of the investment can be mitigated both financially and for tax purposes.

Declining balance depreciation: A key lever for investors

One particularly effective instrument is declining balance depreciation (AfA) for newly built rental apartments. While depreciation was traditionally calculated on a straight-line basis, current legislation allows higher depreciation amounts in the early years.

The advantage is clear: tax effects are strongest during the initial financing phase. Depreciation reduces taxable income and therefore directly lowers the income tax burden.

The higher the investor’s personal tax rate, the greater this effect. For many high earners, this makes it possible to redirect a substantial portion of ongoing tax payments into building real estate assets.

When is special depreciation allowance for energy-efficient new buildings worthwhile?

In addition to regular depreciation, special depreciation allowances are available for particularly energy-efficient new buildings. While these can significantly enhance tax benefits, they are subject to strict eligibility requirements.

Based on our advisory experience, the following points are crucial:

• Higher energy standards result in additional construction costs.
• These costs are only justified if the resulting tax savings outweigh the additional expenditure.
• Making investment decisions based solely on subsidies involves considerable risk.

A holistic assessment that integrates tax, construction, and financing considerations is therefore essential.

KfW funding: Favorable interest rates as a financing advantage

Beyond depreciation, financing plays a decisive role in the profitability of an investment. For new builds, KfW offers specific subsidy programs that allow part of the financing to be arranged at reduced interest rates.

This advantage is particularly relevant for smaller residential units, as the subsidized loan can cover a meaningful share of the total financing. Compared with conventional bank loans, this leads to noticeable interest savings over the loan term.

As a result, the monthly financial burden is reduced—improving the ongoing cash flow of the investment.

Positive cash flow remains achievable

Many investors are discouraged by high purchase prices and financing costs. However, considering these factors in isolation does not provide a complete picture. A comprehensive assessment of income, expenses, and tax implications is essential.

In many cases, it becomes evident that:

• rental income,
• tax relief through depreciation and interest deductions, and
• subsidy benefits

can significantly offset ongoing costs—sometimes even exceeding them. This can result in a positive or at least neutral cash flow despite financing, while simultaneously building long-term assets.

Who Are New-Build Properties Particularly Suitable for?

This investment model is especially attractive for investors who:

• have a stable, above-average income,
• possess available equity capital,
• pursue a long-term investment strategy, and
• actively seek to optimize tax effects.

Employees in particular benefit from the ability to offset losses from rental activities directly against their regular income—if desired, even on a monthly basis through income tax adjustments.

Long-term perspective: Wealth accumulation and tax-free disposal

The full benefits of real estate investments typically materialize over time. Once the statutory holding period has expired, the property can be sold tax-free. Combined with the depreciation previously claimed, this creates an attractive overall effect:

• ongoing tax savings,
• loan repayment funded by rental income, and
• potential appreciation in property value.

Many investors use this approach to reinvest in new properties after several years and take advantage of depreciation benefits once again.

Conclusion: Investing in newly built residential properties offers a real opportunity

A newly built property should never be acquired solely for tax reasons. Key questions to consider include:

• Does the property align with your personal circumstances and financial planning?
• Are the location, quality, and rental prospects convincing?
• How do taxation, financing, and subsidies interact overall?

When structured correctly, new-build properties can be a powerful instrument for:

• legally reducing taxes,
• leveraging government incentives, and
• building long-term wealth.

Achieving this requires sound planning and a holistic approach that integrates tax law, financing, and long-term wealth strategy. This is exactly how we support our clients—from the initial feasibility assessment to ongoing tax advisory services.

We would be happy to hear from you.