When buying a property, most buyers primarily focus on the purchase price, the location, and financing options. However, one important tax-related aspect is often overlooked: the allocation of the purchase price between the land and the building. Especially when purchasing a single-family home with a garden, this allocation can have a significant impact on the tax benefits you receive later.
The reason lies in the tax rules governing depreciation. For tax purposes, only the value of the building can be depreciated through what is known as AfA (depreciation for wear and tear). The land portion, on the other hand, cannot be depreciated. As a result, the way the purchase price is allocated directly affects the amount you can deduct each year.
When acquiring a property, you always purchase two components: the land and the building constructed on it. From a tax perspective, these two elements are treated differently.
Buildings gradually lose value over time due to wear and aging. Because of this economic depreciation, tax law allows property owners to deduct part of the building’s value each year. Land, however, is considered a durable asset that does not depreciate.
Problems arise when the purchase price is not clearly divided between land and building in the purchase agreement. In such cases, the tax office will determine the allocation itself. Unfortunately for buyers, this often leads to a relatively high land value being assumed, which reduces the share attributed to the building.
As a result, the depreciable value of the building becomes smaller, and the annual tax deduction decreases.
For rental properties in particular, this difference can accumulate over many years and significantly influence the profitability of the investment.
To avoid tax disadvantages, it is advisable to define the purchase price allocation directly in the notarized purchase agreement. If the contract clearly states which portion of the purchase price relates to the land and which to the building, the tax office will generally accept this allocation—provided it is reasonable and supported by realistic values.
Several factors should be taken into account when determining a plausible allocation, including:
If these aspects are documented transparently, the likelihood that the tax office will challenge the allocation later is significantly reduced.
Different valuation methods can be used to determine a reasonable allocation between land and building.
In the past, the residual value method was commonly applied. Under this approach, the value of the land is calculated first and then deducted from the total purchase price. The remaining amount is considered the value of the building. Today, however, this method is widely regarded as outdated and is only rarely accepted by tax authorities.
Instead, the market value method has become the preferred approach in practice. With this method, both the land and the building are evaluated separately and then set in proportion to the overall purchase price. This provides a more realistic reflection of actual market conditions and is generally considered more legally secure.
In practice, many property buyers leave the purchase price allocation entirely to the tax office. By doing so, they often miss out on potential tax advantages.
Particularly for long-term rental investments, an optimized allocation can significantly influence the tax burden over time.
Before purchasing a property or signing the purchase contract, buyers should review several important aspects:
A professional appraisal can provide a solid basis for a realistic allocation and often helps avoid disputes with the tax authorities later on.
The allocation of the purchase price between land and building is a crucial—but often underestimated—factor in property purchases. It directly affects the level of depreciation and therefore the tax advantages available to property owners.
By addressing this issue early and defining a reasonable allocation in the purchase agreement, buyers can optimize their depreciation and secure long-term tax benefits. Especially when purchasing a single-family home with land, taking a closer look at the purchase price structure can make a significant financial difference.