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Tax benefits when renting out an inherited property
Have you inherited a property and are wondering how you can minimise the tax burden? Renting offers significant tax benefits that many heirs are unaware of. Discover how you can save thousands of euros with the right strategy.
With access to Google, BORIS, and Deep Research.
Rented residential properties receive a valuation discount of 10% on inheritance tax, which immediately reduces the tax burden.
As an heir, you continue the depreciation (AfA) of the previous owner, typically at 2% of the building's value per year.
A tax-free sale of the property is possible if there are more than 10 years between the purchase by the testator and the sale by the heir.
Inheriting a property is a significant event, but it can quickly be overshadowed by tax issues. Is renting it out worthwhile from a tax perspective? The answer is a clear yes, provided you know the rules. From proper depreciation (AfA) and deducting all advertising costs to the strategic use of deadlines – the tax advantages of renting out an inherited property are substantial. This article shows you how to optimise your rental income and avoid pitfalls. A thorough evaluation of your inherited property is the first step to making data-driven decisions.
Reduce Inheritance Tax: Rented residential properties are assessed at only 90% of their market value for inheritance tax purposes, which directly reduces your tax burden.
Lower Ongoing Taxes: Annually claim 2% to 3% of the property's value as a depreciation deduction from tax (AfA) to reduce your taxable income.
Deduct All Costs: Almost all expenses related to the property, from property tax to renovation costs, can be claimed as tax-deductible expenses.
Sell Tax-Free: After a holding period of 10 years, which begins with the decedent, the capital gain from the sale is completely tax-free.
These levers are crucial to fully exploiting the financial potential of your inherited property.
Wondering how you can claim the depreciation on your inherited property for tax purposes? The key lies in depreciation for wear and tear (AfA). As an heir, you step into the 'footsteps' of the decedent and continue their depreciation. This means you take over the original acquisition or production costs and the already running depreciation percentage. For properties built after 1924, the linear AfA is generally 2% per year.
An important point is that only the value of the building, not the share of the land, is depreciated. A professional valuation of the inherited property helps to determine this share accurately, thus securing the maximum depreciation. For a building value of €300,000, you can deduct €6,000 annually from your rental income. Correct application of AfA is therefore the basis for your tax savings.
Besides depreciation (AfA), deductible expenses are the second major lever to reduce your tax burden. Every expense incurred to generate rental income reduces your taxable income. Many landlords miss out on actual money because they don't know all the deductible items. The most important deductible expenses include:
Running Costs: Property tax, insurance (e.g. liability, building), fees for property management.
Financing Costs: Interest on loans taken out to finance the property.
Maintenance and Repairs: Costs for renewing windows, repairing heating systems, or painting work.
Other Expenses: Broker fees for tenant searches, costs for advertisements, travel expenses to the property, and even tax advisory fees.
A complete documentation of all receipts is crucial to fully exploit the potential. Knowing these items in detail helps you set the right rental price for your house and maximise your net yield. This lays the groundwork for distinguishing between immediately deductible repair expenses and long-term capitalized renovation costs.
Did you know that major renovations in the first three years after acquisition can become a tax trap? The tax office strictly distinguishes between immediately deductible maintenance expenses and capitalizable acquisition-related production costs. The critical threshold is 15% of the original building costs (excluding VAT).
If your net renovation costs exceed this 15% threshold within three years, the entire costs must be distributed over the remaining useful life of the building, meaning they need to be depreciated. You lose the advantage of immediate deduction of advertising expenses in the year of payment. Therefore, precise planning and accurate calculation of inheritance tax and the building value are essential. This protects you from unexpected additional payments and ensures your liquidity. This strategic planning is also crucial in terms of a potential sale.
Another central aspect of the tax advantages of renting out an inherited property is the speculation period. If you sell the property, a capital gains tax may apply to the sale profit under certain circumstances. The crucial period for this is ten years. The significant advantage for heirs: the period does not start with the inheritance, but with the original purchase date by the deceased.
For example, if the deceased owned and rented out the property for eight years, you as the heir only need to wait two more years to sell it completely tax-free. This 'inherited' period is an enormous financial advantage. Before making a decision about selling or renting, you should check this date. It significantly influences your long-term strategy and potential return.
Even before receiving your first rental income, you can save taxes by deciding to rent out. The Inheritance Tax Act favours the provision of housing. For a property rented for residential purposes, the tax office grants a valuation reduction of 10%. This means that for the calculation of inheritance tax, the property is assessed at only 90% of its market value.
If the market value is €500,000, the assessment base is therefore reduced to €450,000. Depending on your personal allowance, this reduction can lower your tax burden by several thousand euros. This advantage explicitly applies only to rented properties and is a clear signal from the legislator. To legally take advantage of this and other benefits, it is important to know the pitfalls of inheritance tax. The right strategy already begins at the moment of inheritance.
Renting an inherited property is more than just a source of income – it is an effective tool for tax optimisation. By consistently utilising depreciation (AfA), fully deducting advertising expenses, and adhering to strategic periods such as the 10-year holding period, you can transform a potential tax burden into a financial advantage. The 10% valuation deduction on inheritance tax provides the first positive incentive.
The key to success lies in thorough planning and an accurate understanding of the numbers. A precise property valuation forms the basis for almost all tax calculations. Do not act on gut feeling, but make data-driven decisions. If you are unsure how to accurately assess the value of your property or which expenses are deductible, use tools such as our ImmoGPT chat or a non-binding initial consultation. This ensures that you fully exploit all tax advantages when renting out your inherited property.
The Federal Ministry of Finance offers comprehensive information on inheritance and gift tax.
Another article by the Federal Ministry of Finance explains the application of regulations for the valuation of real estate within the framework of inheritance and gift tax.
The Federal Statistical Office (Destatis) provides content and data on the topic of housing.
A press release from the Federal Statistical Office (Destatis) also addresses the topic of housing.
The Wikipedia article on inheritance tax in Germany offers a detailed overview.
The Federal Agency for Civic Education (bpb) provides a brief explanation of inheritance tax in the Economic Lexicon.
What are the main tax advantages of renting out an inherited property?
The three biggest benefits are: 1. A 10% valuation discount on inheritance tax. 2. The annual depreciation (AfA) of the building's value, which reduces your taxable income. 3. The deduction of all incurred costs (e.g. maintenance, management, interest) as advertising expenses from rental income.
Do I have to pay tax on rental income from an inherited property?
Yes, income from leasing and renting must be reported in Schedule V of your income tax return. Your personal income tax rate is applied to the surplus of income over advertising expenses.
What happens to the speculation period when I inherit a property?
You assume the speculation period from the decedent. The 10-year period starts from the date when the decedent purchased the property, not from the date of inheritance. This significantly reduces the time you have to wait for a tax-free sale.
What expenses can I deduct as advertising expenses?
Deductible expenses include: depreciation (AfA), loan interest, property tax, repair and maintenance costs, insurance premiums, management costs, brokerage fees for tenant search, travel costs to the property, and account management fees for the rental account.
What is the difference between maintenance costs and capital expenses?
Maintenance costs (e.g. repairs) can be deducted immediately as advertising expenses in the same year. Acquisition-related capital expenses (extensive modernisations exceeding 15% of the building costs in the first 3 years) must be depreciated over the useful life of the building.
Is renting out an inherited property always worthwhile?
From a tax perspective, renting is often very advantageous. Whether it is worthwhile overall depends on factors such as the condition of the property, the local rental market, your management effort, and your personal financial goals. A comparative calculation between selling and renting can provide clarity.
