Does your real estate balance sheet hide hidden burdens or untapped potential? Correct HGB accounting of rental properties is more than a duty – it is a strategic tool that determines the financial success of your investment.
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The topic briefly and concisely
The HGB accounting of rental properties is strictly based on the acquisition cost principle, with all ancillary costs to be capitalised.
The mitigated lower-of-cost-or-market principle requires an extraordinary write-down only in cases of a likely permanent impairment of value.
If the reasons for a write-down no longer exist, there is an obligation to reverse the impairment up to the maximum of the amortized cost.
For many real estate owners, accounting in accordance with the German Commercial Code (HGB) is merely a formality. However, when it comes to HGB accounting for rental properties, small errors can have significant financial repercussions, ranging from increased tax burdens to flawed investment decisions. Valuation at acquisition cost, correct depreciation, and handling value fluctuations are critical. This article shows you how to not only comply with HGB regulations but also actively use them for value management of your properties. We translate the complex rules into clear, data-driven action recommendations for private owners and investors.
The cost principle as the foundation of valuation
The basis for accounting for your rental property is the acquisition cost principle according to § 255 paragraph 1 HGB. All expenditures necessary to bring the object into an operational state are capitalized. This includes not only the pure purchase price but also incidental costs such as land acquisition tax of up to 6.5%, notary fees of around 1.5%, and broker commissions. These incidental acquisition costs can quickly make up 10-15% of the purchase price and must be precisely recorded. The land is valued separately from the building, as it is not subject to wear and tear and therefore is not depreciated. A precise allocation is crucial for the subsequent correct determination of depreciation. The precise recording of all costs from day one lays the foundation for a clean balance history.
Scheduled depreciation to reflect the reduction in value
Buildings lose value over time, and this loss in value is reflected by regular depreciation (deduction for wear and tear, AfA). For residential properties completed after 1924 and before 2023, a straight-line depreciation of 2% per year over 50 years applies. For new builds from 1 January 2023, the rate has been increased to 3%, which corresponds to a useful life of 33.3 years. For acquisition costs of the building of €400,000, an increase in AfA from 2% to 3% means an additional tax relief of €4,000 per year. These depreciations reduce the taxable profit from renting and leasing as expenses. A correct valuation of land and buildings is the prerequisite for establishing the correct AfA basis. However, not every depreciation runs as planned, leading us to extraordinary corrections.
The principle of lower of cost or market to safeguard against depreciation
What happens if the value of your property unexpectedly and permanently decreases, for instance due to structural damage or negative location developments? This is where the reduced lower-of-cost-or-market principle for fixed assets according to § 253 Absatz 3 HGB comes into play. If the fair value is expected to be permanently lower than the book value, there is an obligation for an impairment write-down. Such a depreciation must be substantiated by facts, for example through a significant decrease in achievable rents by over 20%. An independent valuation report is often the basis for recognition by the tax office. This write-down protects creditors from an exaggerated representation of assets in the balance sheet. With an accurate market value determination according to HGB, you can identify such risks early. Conversely, the value of a property can also rise again.
Requirement for value recovery to realise hidden reserves
If the reasons for a previous unscheduled depreciation no longer apply, the requirement to reverse impairments under § 253 (5) HGB applies. You are then obliged to make a write-up, meaning to increase the value in the balance sheet again. An example: A property was depreciated by €50,000 due to high vacancy rates. After successful re-letting, the reason for the impairment no longer applies. However, the reversal of impairment is limited to the continued acquisition or production costs – true market value increases beyond that may not be reflected. This principle prevents the recognition of unrealised gains and is a key difference from IFRS valuation. Therefore, careful documentation of the reasons for value changes is essential.
Maintenance Costs or Production Costs: A Critical Distinction
The correct allocation of construction and modernisation measures is one of the most common sources of errors with a direct impact on your profit.
The distinction is crucial:
Maintenance expenses: Costs for maintenance and repair that restore the proper condition (e.g. replacement of defective windows). These are immediately deductible as expenses.
Production costs: Expenditures that significantly improve the value of the building or change its use type (e.g. addition of a balcony). These must be capitalised and depreciated over their useful life.
A significant improvement often occurs when the utility value increases significantly, which can be reflected in a rent increase of at least 10%. A special tax regulation concerns acquisition-related production costs: Should net repair costs exceed 15% of the purchase price of the building within 3 years of purchase, they are treated as production costs. This delineation requires a precise analysis of each measure.
HGB vs. IFRS: Strategic Implications for Investors
While the German Commercial Code (HGB) serves creditor protection through the principle of prudence and historical cost accounting, the International Financial Reporting Standards (IFRS) focus on the informational function for investors. Under IFRS, real estate can be valued at fair value, which means that market value increases beyond the purchase cost can be recognised. A property with acquisition costs of €500,000 and a market value of €800,000 would be listed at a maximum of €500,000 (less depreciation) in an HGB balance sheet, whereas in an IFRS balance sheet it would be shown at €800,000. This leads to higher equity disclosure under IFRS, but also to more volatility. For internationally operating investors, understanding these different accounting approaches is crucial for portfolio analysis. Therefore, the choice of accounting standard has direct strategic implications.
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How do you ensure that your balance sheet values are accurate, especially when it comes to the principle of lower of cost or market, or strategic sales decisions? An outdated or inaccurate valuation can cost you thousands of euros. This is where digital tools come into play, providing a data-driven and objective basis. Modern analysis tools can analyse market value fluctuations in real time, allowing you to recognise the need for an extraordinary write-down early on. Instead of relying on gut feeling, you receive an accurate, AI-supported property valuation. This serves as solid documentation for the tax office and as a strategic basis for your decisions. Do you need a quick assessment of your property's current value? Use our Rental Yield Calculator or chat for free now with our ImmoGPT to analyse your property's potential.
Conclusion: Active management instead of passive administration
How do I account for a received rental deposit under HGB?
A cash deposit received from the tenant represents a liability for the landlord. It is shown on the liability side of the balance sheet under “Other liabilities”, as the money is held in trust for the tenant and must be repaid.
Do I have to increase the value of my property when the market price rises?
No. Under HGB, a strict upper value limit applies, which is based on the historical acquisition or production costs (less regular depreciation). A write-up is only permitted if the reasons for a previous extraordinary depreciation no longer apply, but never beyond this upper limit.
Why is HGB valuation important for me as a private owner?
Even if you are not obliged to keep double-entry bookkeeping, the principles of HGB valuation are relevant for determining taxable profits from rental and leasing. The correct calculation of depreciation and the allocation of expenses directly affect your tax liability.
What are acquisition-related production costs?
If within the first three years after purchasing a property, repair and modernization expenses arise that exceed 15% of the net acquisition costs of the building, these are treated as production costs for tax purposes. They must then be capitalized and depreciated rather than immediately deductible.
Can I also depreciate land?
No, land is not subject to wear and tear and therefore cannot be depreciated either under HGB or tax law. When it comes to a developed property, the purchase price must always be divided into a portion for the building and one for the land.
Additional useful links
Ministerium für Finanzen Baden-Württemberg offers a comprehensive guide to accounting, containing important principles and practical advice.
Institut der Wirtschaftsprüfer (IDW) provides the IDW ERS IFA 3 pronouncement on financial reporting, which is relevant for auditors.
Gesetze im Internet offers access to the complete legal text of the Commercial Code (HGB).
Statistisches Bundesamt (Destatis) publishes statistical data, including tables on rents and household net income.
Deutsche Bundesbank provides an indicators system on the residential property market, highlighting key figures and developments.
Bundesfinanzministerium offers comprehensive information on taxes and relevant legislation.
Bundesfinanzhof (BFH) provides access to decisions and judgments of the highest German court for tax and customs law.
Bundesverband deutscher Banken (Bankenverband) discusses challenges and solutions for financing affordable housing.
FAQ
How do I account for a received rental deposit according to the German Commercial Code (HGB)?
A cash deposit received from the tenant represents a liability for the landlord. It is shown on the liabilities side of the balance sheet under 'Other Liabilities', as the money is held in trust for the tenant and must be refunded.
Should I increase the value of my property if the market price rises?
No. According to the German Commercial Code (HGB), there is a strict upper value limit based on the historical purchase or production costs (minus scheduled depreciation). A write-up is only made if the reasons for an earlier unscheduled depreciation no longer apply, but never beyond this upper limit.
Why is the HGB valuation important to me as a private owner?
Even if you are not required to use double-entry bookkeeping, the principles of HGB valuation are relevant for determining taxable income from rental and leasing. The correct calculation of depreciation and the allocation of expenses directly impact your tax liability.
What are acquisition-related production costs?
If maintenance and modernization expenses are incurred within the first three years after purchasing a property, and their net amount exceeds 15% of the acquisition costs of the building, they are treated as production costs for tax purposes. They must then be capitalized and depreciated, instead of being immediately deductible.
Can I also depreciate the land?
No, land is not subject to depreciation and therefore cannot be written off under either the German Commercial Code (HGB) or tax law. For a developed property, the purchase price must always be divided into a portion for the building and a portion for the land.
