Guide to Annex V – how to deduct all rental costs?

Do you rent out an apartment, house, garage, or part of a property in Germany? If so, the tax return may require Anlage V, the Rental Income Supplement. This is the form used to report income from private letting and the expenses that can reduce taxable income. The rule is simple: first the rental income is shown, then the expenses incurred to generate, maintain, or secure that income are deducted. Care is needed, however, because not every expense is deducted immediately; some items are entered directly in the return, while others are claimed through AfA depreciation.

What is Anlage V and when must it be completed?

Anlage V is completed when income is earned in Germany from the private letting or leasing of property. This applies primarily to apartments, houses, commercial units, garages, parking spaces, parts of buildings, individual rooms, or land. If someone pays for the use of a property or part of it, the tax office may expect those receipts to be reported in Anlage V.

This is not limited to the classic long-term rental of an apartment. The same category may also include income from a holiday apartment, room rental via the internet, a garage, advertising space on a building wall, space for an antenna, a solar installation, or another part of the property. The key issue is whether income is generated from the paid transfer of use of an asset or right connected with the property.

Multiple properties – separate reporting for each

If more than one property is rented out, the data must be kept separate. In practice, a separate statement of income and expenses is prepared for each rented building, apartment, or self-contained unit. This prevents rent from one apartment from being mixed up with renovation work carried out in another unit.

This matters for an audit, but also for the calculation of the tax result itself. One apartment may have generated a profit, while another produced a loss because of renovation work, vacancy, or high loan interest. If assistance is used for a German tax return, the data should be prepared separately for each property: lease agreement, income, expenses, loan, renovations, and information on vacancy periods.

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Before entering figures into Anlage V, prepare a separate schedule for each property: income, Nebenkosten, renovations, loan, depreciation, and other expenses. Do not attempt to reconstruct everything directly in the form from bank statements and invoices. In rental matters, most costly mistakes do not arise from the absence of a deduction right, but from assigning the correct expense to the wrong category or to the wrong property.

How does the basic rental reporting rule work?

Rental income in Anlage V is calculated as income less deductible business expenses. In practice, this means that not only the rent is entered, but the full picture is shown: how much money was received from the tenant and what expenses were incurred by the owner.

On the income side, the main item is rent. In addition, there may be further income: additional charges, advance payments for utilities, arrears of rent received for prior years, receipts for a garage, parking space, or other areas. If the tenant pays EUR 900 in rent and EUR 250 as a Nebenkosten advance payment, the calculation must not focus only on the net rent. The charges collected from the tenant must also be included, and then the corresponding costs must be shown.

On the expense side, costs related to the rental will be included: operating expenses, insurance, property tax, property management fees, repairs, loan interest, administrative costs, tax advice, and depreciation. For each invoice, one question should be asked: was this expense incurred to generate, maintain, or secure rental income? If so, it may be deductible. If it relates to private use, it must be excluded or allocated proportionately.

Why is an invoice not enough on its own?

The tax office does not look only at the invoice description. The nature of the expense is decisive. Painting an apartment after the tenant moves out is a different matter from converting an attic and creating a new unit. Both expenses relate to the property, but for tax purposes they may be treated completely differently.

For larger expenses, it is therefore advisable to record immediately what the work related to. Was it a repair of an existing element? An upgrade? An extension? Preparation of the property for its first rental after purchase? Such a description is very helpful when later completing Anlage V.

Which rental income must be reported?

In Anlage V, all receipts arising from the paid transfer of use of property or part of a property are reported. The payment reference is not decisive. What matters is whether the money is connected with the rental.

The most obvious item is rent for the apartment. In addition, other income may arise: fees for a garage, parking space, storage room, part of a plot, advertising space, an antenna, technical equipment, or other use of the property. If the tenant also pays advance payments for utilities and operating costs, these receipts must also be correctly recorded.

Income may also include arrears of rent received for prior years, interest for late payment, refunds of costs previously incurred, fees for early termination of the contract, or compensation from the tenant for damage to the apartment. Some amounts occur only once and are therefore easy to overlook in the annual schedule.

Which current expenses can be deducted?

Rental income allows current property maintenance costs to be deducted if they relate to the rented portion and were actually incurred. This is the most common group of expenses in Anlage V, but it must be properly organised.

Such costs include above all operating expenses: water, sewage, heating, hot water, waste disposal, cleaning of common areas, stairwell lighting, chimney sweep services, maintenance of installations, lift costs, and other building maintenance expenses. If these are paid by the owner and later charged to the tenant, both sides are shown: the amounts received from the tenant as income and the bills as expenses.

Expenses may also include Grundsteuer, i.e. German property tax, and building insurance. Deductible insurance costs include, among others, fire, storm, hail, lightning, flood, and other elemental damage insurance. In certain cases, costs for building security, construction insurance, or property-related liability insurance may also be deductible if they are connected with the rental.

How are renovations and repairs of a rental apartment treated?

Renovations and repairs to a rental apartment can often be deducted immediately if they serve to maintain the existing condition of the property. In German tax treatment, these are Erhaltungsaufwendungen, meaning expenses for repairing, refurbishing, or replacing existing elements. This includes, for example, painting walls after a tenant moves out, repairing fittings, replacing worn doors, refurbishing floors, or correcting installation defects. The situation is different where the work creates something new, such as a balcony, an additional attic apartment, an extension of the building, or a change in the function of rooms. In that case, the expense may increase the depreciable basis instead of being deducted immediately.

Special caution is required in the first 3 years after acquisition of the building. If renovation and modernization costs during this period exceed 15% of the net acquisition cost of the building, the tax office may classify them as anschaffungsnahe Herstellungskosten. This means that they cannot be deducted in full at once, but are claimed gradually through depreciation. This assessment may also include work that appears to be ordinary refurbishment, which is why a larger renovation after purchasing an apartment should be planned and documented before the return is filed.

How is depreciation of the building reported?

AfA depreciation allows the cost of the building to be claimed over time, but it does not apply to the land. This is one of the fundamental rules for rental real estate in Germany.

When purchasing an apartment, house, or building, the entire purchase price is not depreciated. The value of the land must be separated from the value of the building. Land does not depreciate for tax purposes, so its cost is not the basis for depreciation. The building, by contrast, wears out over time and can be claimed through AfA.

If a property is purchased for EUR 300,000, this does not automatically mean that the entire amount forms the basis for depreciation. Part of the price may relate to the land. In addition, acquisition costs such as notary fees, real estate transfer tax, court fees, or the estate agent’s commission on purchase must be assessed. Some increase the initial value, while others may have a different tax character.

How to account for furnishings, furniture, the kitchen and the garden?

Furnishings in a rental apartment can be deductible expenses, but they often have to be depreciated instead of written off in one go. Everything depends on the type of item, its value and the period of use.

A complete replacement of a fitted kitchen is usually not treated as an ordinary repair. A fitted kitchen is regarded as a business asset and is depreciated over 10 years. This applies to a set consisting, among other things, of cabinets, sink, stove and other elements forming a functional unit. If only a single damaged component is replaced, the matter must be assessed separately.

Furnishings may also include furniture in a furnished apartment, a washing machine, refrigerator, bed, wardrobe, desk, lawnmower or tools used for maintaining the property. If an individual asset costs no more than EUR 800 net, it may qualify for a one-off deduction as a low-value asset. The invoice should nevertheless be retained and the place of use of the item should be documented.

How to deduct loan interest and financing costs?

Loan interest may be deducted if the loan was used for the rented property and is connected with generating rental income. The mere existence of a loan is not sufficient. It must be shown that the funds financed the property used for rental.

Financing costs may include interest, costs of establishing security, fees for the registration of a mortgage or Grundschuld, as well as certain financing procurement costs. Separate rules also apply to Disagio and Damnum. Under certain conditions, these may be deductible if they fall within market limits. In simplified terms, a threshold of up to 5% has been indicated for a loan with a fixed-interest period of at least 5 years.

Interest may also be deductible before the rental begins if it can be shown that the decision to rent out was already concrete. Useful evidence includes preparation of the unit, advertisements, discussions with prospective tenants, contact with an agent or other documents showing that the property was intended for rental.

How to account for short-term letting and a holiday apartment?

Short-term letting is reported in Anlage V if it has the character of private rental, but the expenses must be allocated only to the part used for income-generating purposes. The main issue here is the mixing of rental use with private use.

If an apartment is rented to tourists and used privately outside the season, the costs must be apportioned. Expenses exclusively connected with the rental, such as booking platform fees, advertising, guest cleaning or the purchase of an additional bed, may be allocated to the rental activity. Shared costs, such as depreciation, energy, heating, insurance and administration, require apportionment.

For a holiday apartment, the days of use are particularly important. If the property was rented for part of the year, reserved for personal use for part of the year and vacant for the remaining time, it must be determined which periods relate to rental and which to private use. Periods reserved for the owner may be treated as private use even if the owner ultimately did not make use of them.

When can rental look like a business activity?

Ordinary short-term rental does not automatically mean business activity. The risk increases when services similar to hotel services are offered, such as reception, breakfast, permanent guest service, organised cleaning during the stay or extensive service infrastructure.

Bed linen, towels, final cleaning or guest instructions alone usually do not yet determine business activity. For larger-scale short-term rental, however, the classification should be checked before the tax return is filed.

How to prepare documents for Annex V?

For the reporting in Anlage V, prepare documents showing income, costs, the connection between the expenses and the rental activity, and the method of cost allocation. Good documentation is often more important than the amount of the cost itself.

The basis consists of the rental agreement, rent schedules, Nebenkosten statements, bank statements, invoices for repairs, utility bills, the Grundsteuer notice, insurance policies, loan documents, annual interest statements, invoices from the property manager and documents relating to tax advice. If the property was partly used privately, prepare the floor area and a description of the proportions.

For repairs, add a short note describing the nature of the work. For vacancy periods, collect evidence of the search for a tenant. For rental to family members, prepare a comparison with the market rent. For furnishings, describe what was purchased, where the item is located and who uses it.

The simplest document structure

A division into several groups works well:

• rental income and additional charges,
• operating expenses and utilities,
• taxes, insurance and administration,
• renovations and repairs,
• loan and financing costs,
• depreciation of the building and furnishings,
• vacancy, advertisements and tenant search,
• cost allocation in case of private use.

Such a structure makes it easier to quickly check whether anything is missing. It also facilitates the work of the person preparing the German tax return.

What mistakes should be avoided when deducting rental costs?

The most common mistake consists in entering all expenses under one category without checking whether they are current expenses, depreciation, or private expenses. This can lead to questions from the tax office, an assessment correction, or additional tax due.

The first issue concerns renovations after purchase. If an apartment is purchased and a major renovation is carried out within the first 3 years, the threshold of 15% of the net acquisition costs of the building must be examined. Once this threshold is exceeded, the expenses may be allocated to depreciation rather than to one-time expenses.

The second mistake is the lack of apportionment in the case of private use. If only part of a house, a room, or a holiday apartment used also privately is rented out, not everything should be deducted automatically. A proportion and a logical allocation of costs are required.

The third mistake concerns deposits and additional charges. A deposit is not ordinary income when received, but it may become income if retained. Prepayments from the tenant for Nebenkosten may constitute income, while the corresponding invoices are expenses. If only one side is shown, the calculation will be incomplete.

Before submitting the tax return, check whether each significant expense has supporting documentation, a description, and a clear link to the rental activity. Go through the entire year step by step: when the property was rented out, whether there was any vacancy, whether the property was used privately, whether renovations were carried out, furnishings purchased, a deposit retained, or a loan repaid with interest. The safest approach is first to collect the documents, then to divide the expenses into categories, separate the private portion from the rental portion, review renovations and depreciation, and only then enter the data into Anlage V. Proper reporting is not about entering as many expenses as possible, but about deducting everything that can actually be deducted and can be substantiated with documents, proportional allocation, and the logic of the German tax return.