The Future of Real Estate Tax Strategy: Navigating the “AfA Step-Up” in 2026 and Beyond
The popular “AfA Step-Up” – a method for increasing depreciation allowances – remains a viable tax strategy for property investors, but is becoming increasingly regulated. Recent court rulings and guidance from the German Federal Ministry of Finance (BMF) are clarifying and narrowing its application.
The “AfA Step-Up” Remains a Valid Strategy
The real estate sector can breathe a collective sigh of relief. Fears that assessing a shorter residual useful life for buildings would be significantly complicated have not materialized. The final version of the “Seventh Ordinance amending tax regulations” does not include the most stringent planned restrictions. This is positive news: the combination of Step-Up (increasing the depreciation value) and a shortened useful life (increasing the depreciation rate) remains a permissible tax optimization technique.
Tax experts emphasize that the requirements for expert appraisals remain high. However, the initially feared “prohibition-like” hurdles have been removed. Investors can continue to use independent valuations to justify depreciation rates of 3, 4 percent, or more – provided the condition of the property warrants it. This is particularly relevant when private property is contributed to a limited liability company (GmbH).
BMF Clarification on Renovation Costs
A core element of the Step-Up strategy is the cycle “Buy, Contribute, Renovate.” Often, properties are contributed to a capital company at a higher partial value and then modernized. The tax risk previously lay in “ancillary acquisition costs.” If renovation costs exceed 15 percent of the building’s value within three years, they cannot be deducted immediately as operating expenses but must be depreciated over the building’s useful life.
The BMF is providing clarity with a comprehensive letter dated January 26, 2026, replacing outdated guidelines and offering sharper definitions for distinguishing between maintenance and construction.
- Standard Upgrade: Measures that merely bring a building up to a “contemporary” standard – such as a bathroom renovation – do not automatically trigger the construction cost trap, unless they significantly raise the standard through several key features (heating, plumbing, electrical, windows).
- Energy Efficiency: Specific energy-saving measures are now more clearly defined, giving investors more planning certainty when modernizing older residential properties within their companies.
This means renovations following contribution can be planned more precisely, avoiding the misclassification of immediately deductible maintenance costs as long-term depreciable assets.
Grunderwerbsteuer (Real Estate Transfer Tax) and Residential Rights
While depreciation news is positive, a recent ruling from the Federal Finance Court (BFH) on February 5th warns of caution regarding real estate transfer tax when a property is transferred with a reserved right of residence.
The BFH clarified that if the purchaser assumes a right of residence, its capital value increases the tax base for real estate transfer tax. It is not a “permanent burden” that reduces the taxable value.
Implications for the Step-Up: Many investors transfer properties to their own GmbH or family foundation while retaining usage rights for family members. The ruling explicitly states that the value of these rights is added to the transaction value for tax purposes.
Example: If a property worth 1 million euros is contributed to a GmbH and the contributor retains a right of residence worth 200,000 euros, the real estate transfer tax is calculated on the full value, including this “consideration.”
This decision is a warning to accurately calculate the transaction costs of a Step-Up. The goal is the income tax benefit through higher depreciation, but the real estate transfer tax trigger can reduce these gains if not correctly calculated.
How the Step-Up Works in 2026: The Partial Value Contribution
Despite the complexity, the core mechanism of the AfA Step-Up remains the strongest lever for owners of existing properties, utilizing § 6 Abs. 1 Nr. 5 EStG. If a property has been privately held for more than three years, it can typically be contributed to a GmbH at its current partial value (market value) – not at the historical acquisition cost.
The Calculation Logic for 2026:
1. Historical Basis: An investor purchased a building in 2010 for 300,000 euros. It is fully depreciated or has a low residual value.
2. Market Value 2026: The property is now worth 900,000 euros.
3. The Step-Up: When contributed to the GmbH, the modern depreciation basis is 900,000 euros.
4. The Effect: Instead of 300,000 euros (or zero), the GmbH now depreciates 900,000 euros. At a recognized rate of 3 percent or more, the annual tax-reducing amount is tripled or quadrupled.
Tax advisors warn of the “Three-Year Trap”: If the property was acquired less than three years ago, the contribution value is capped at the historical acquisition cost less depreciation.
Market Outlook: Stabilization Favors Strategy
The market environment in February 2026 favors the strategy. After the volatility of 2024 and 2025, property valuations in many German metropolitan areas have stabilized. This stability provides a reliable basis for partial value determination. Unlike boom phases, where values could be challenged as “overheated,” current market values are now well supported by yield data and therefore better defensible against tax office audits.
Industry observers see 2026 as a year of “technical optimization.” With the fully integrated Growth Opportunities Act and the new BFH rulings as benchmarks, the “Wild West” phase of aggressive structuring is ending. It is being replaced by highly calculated, legally sound asset transfers. The AfA Step-Up is not dead – it has matured.
Frequently Asked Questions (FAQ)
- What is the AfA Step-Up? It’s a tax strategy that allows you to increase the depreciation basis of a property by contributing it to a GmbH at its current market value.
- Is the Step-Up still legal in 2026? Yes, but it’s subject to stricter regulations and requires careful planning and documentation.
- What is the “Three-Year Trap”? If you acquired the property less than three years ago, you can’t use the current market value for the Step-Up. you’re limited to the original acquisition cost less depreciation.
- How does the BFH ruling on residential rights affect the Step-Up? The value of any residential rights retained by the original owner must be included in the tax base for real estate transfer tax.
Want to learn more about optimizing your real estate tax strategy? Explore our other articles on German tax law and property investment.
