Rental income from an apartment or house can be an attractive source of revenue for many property owners. However, with these earnings comes the responsibility to properly handle taxation. Whether you are new to renting out property or have been earning rental income for years, understanding your tax obligations and opportunities can help you optimize your tax burden and avoid unpleasant surprises with the tax authorities.
In this article, you will learn how rental income is taxed, which allowances apply, which expenses are deductible, how tax calculations work, and tips to reduce your taxes. There are also specific considerations if you are part of a homeowners’ association (WEG).
What Counts as Rental Income?Link to this section
Rental income includes all earnings you receive as a landlord from letting your property. This includes:
- Monthly rent as per the lease agreement
- Utility costs not passed on to third parties
- Income from renting garages or parking spaces
- Income from subletting
- Short-term rentals, e.g., via online platforms
Rental deposits or amounts paid directly to service providers are not considered rental income. One-time compensation payments are generally also excluded.
Legal Basis: Income from Renting and LeasingLink to this section
Under the German Income Tax Act (EStG), rental income falls under “income from renting and leasing” — one of the seven types of taxable income. In addition to rental income, this category also includes income from leasing land, buildings, or parts thereof.
For taxation purposes, what matters is not the gross income but the surplus of income after deducting allowable expenses. This surplus is then taxed at your personal income tax rate.
Are Rental Earnings Taxable?Link to this section
Yes. Any income from renting property must generally be taxed, whether it’s a single room, a granny flat, or an entire property. Even occasional or short-term rentals, such as through holiday rental platforms, may be subject to tax.
Certain thresholds exist below which taxation may not apply in practice. Nevertheless, all income must be declared to the tax office. Thorough documentation of income and expenses is highly recommended to ensure you are prepared in case of an audit.
Tax-Free Allowance: When You Don’t Pay TaxesLink to this section
The basic tax allowance (Grundfreibetrag) in 2025 is €11,604 for individuals and €23,208 for joint filers. If your taxable income, including rental income, falls below this threshold, you do not owe income tax.
Note: The allowance applies to your total income, not just rental income. Therefore, rental earnings must be considered alongside other income sources, such as employment, investments, or pensions.
How Rental Income Is TaxedLink to this section
Rental income is taxed at your individual income tax rate, which starts at 14% and rises progressively to 45% for high incomes. In addition, solidarity surcharge and church tax may apply.
Example:
- Rental income: €12,000/year
- Deductible expenses: €4,000 (e.g., interest, repairs, depreciation)
- Surplus: €8,000
- Personal tax rate: 30%
- Tax owed: €2,400
Even small surpluses can lead to a noticeable tax liability, especially if they push your taxable income into a higher bracket.
Deductible Expenses (Werbungskosten)
Deductible expenses are all costs directly related to generating rental income. Typical examples include:
- Mortgage interest
- Ongoing maintenance and repairs
- Property management fees
- Non-recoverable homeowners’ association fees
- Utility settlements
- Tax advice related to the property
- Travel expenses to the rental property
- Advertising costs for tenant search
- Costs for energy certificates, rental contracts, legal protection
Depreciation (AfA) is also deductible, as it accounts for the property’s wear and tear.
Depreciation: Reducing Your Tax BurdenLink to this section
Depreciation allows you to spread the building’s acquisition cost over many years for tax purposes. Land costs are not depreciable.
Standard depreciation rates:
- 2% per year for buildings completed after December 31, 1924
- 2.5% per year for buildings completed before January 1, 1925
Example:
- Building portion cost: €200,000
- AfA rate: 2%
- Annual deduction: €4,000
- Tax saving (30% rate): €1,200/year
Special Considerations for WEG MembersLink to this section
As a member of a homeowners’ association (WEG), you share costs for the entire property, including operating costs, reserves, and special assessments.
For tax purposes, a distinction must be made between:
- Recoverable costs billed directly to tenants
- Non-recoverable costs you bear personally and can deduct
Typical non-recoverable costs:
- Property management fees
- Contributions to reserves for maintenance
- Costs for communal repairs
- Shares of special assessments (e.g., roof renovations)
These should be listed under “Other deductible expenses” in Annex V of your tax return. Detailed statements from your property management make this easier.
Renting Below Market ValueLink to this section
If you rent your property for less than 66% of the local market rent (net cold rent), the tax office treats it as “partially paid rent.” In such cases, deductible expenses may only be partially recognized.
Example:
- Market rent: €10/m²
- Actual rent: €6/m² → 60%
- Deductible expenses may only be recognized at 60%
Between 66% and 100% of market rent, deductions are fully allowed, assuming no other restrictions.
Filling Out Your Tax Return: Annex VLink to this section
Annex V of the income tax return is used to declare rental income and related deductible expenses.
Tips:
- Use digital tools or spreadsheets for expense tracking
- Keep receipts and proof of payment for all expenses
- Separate private and rental-related costs clearly
- For WEGs, document cost allocations according to ownership shares
VAT and Rental Income
Residential rental income is generally exempt from VAT. VAT may apply to commercial rentals or in cases where the option for VAT taxation is exercised.
For mixed-use properties, VAT obligations may vary depending on usage. Professional tax advice is strongly recommended in such cases.
Rental Income as Part of Wealth Planning
Rental income can contribute steadily to your wealth over the years. Regularly review your property strategy, tax burden, maintenance costs, and property condition.
Real estate is considered a relatively stable investment. Tax benefits, including deductible expenses, depreciation, and tax-free capital gains after 10 years, make it particularly attractive.
Tips for Reducing TaxesLink to this section
- Ensure all deductible expenses are accounted for
- Consider special depreciation (§7b EStG) for energy-efficient new buildings
- Include small costs like travel or legal advice
- Invest strategically, e.g., targeted modernization with subsidies
- Avoid vacancies, otherwise expenses may not be recognized
When to Consider Tax AdviceLink to this section
If you own multiple properties or are unsure about tax classification, professional support is recommended. A tax advisor can help you maximize your property’s potential and rental income.
Benefits include:
- Personalized tax advice
- Correct tax classification
- Review of tax assessments
- Preparation for potential audits
Special Tax Considerations for Vacant PropertiesLink to this section
Expenses for vacant properties can also be deductible if you demonstrate a clear intention to rent. The tax office requires proof of rental efforts, such as:
- Online rental listings
- Brokerage agreements
- Viewing records
Selling Your PropertyLink to this section
Selling your property within ten years of purchase may trigger income tax on the profit (speculation tax). The taxable gain is the difference between the sale price and acquisition cost (minus depreciation).
After ten years, the capital gain is tax-free, provided the property was rented or owner-occupied.
Real Estate as Investment AssetsLink to this section
If you frequently buy and sell properties or hold multiple units, the tax office may classify you as running a commercial activity, with significant tax implications, including trade tax.
Owning five properties within five years generally triggers this classification. Carefully assess past sales before selling additional properties.
ConclusionLink to this section
Taxing rental income is manageable but requires diligence, knowledge, and good organization. As a WEG member, strategic use of deductible expenses, depreciation, and tax planning can significantly reduce your tax burden.
Plan ahead, leverage tax regulations, and seek professional advice if necessary. This way, more of your rental income stays in your pocket, and you avoid conflicts with the tax office.
Meet Ralph
Tax issues around rental income, especially in a WEG, can be complex. That’s where Ralph comes in — your expert for rental management, tax optimization, and homeowners’ associations. Whether it’s correct accounting, necessary documentation, or personalized tax tips, Ralph has the answers.
Looking to reduce your tax burden and manage your property professionally? Ralph is your digital, modern property management partner. Request a free quote, including personalized consultation!
