Do I have to pay tax on rental income?

Yes. Rental income counts as income from letting and leasing and is reported in Schedule V of your income tax return. Tax applies to the surplus after deductible expenses, rather than the rent itself, at your personal income tax rate. One exception is the €520 annual de minimis threshold for temporary letting, such as short-term subletting. Check the current details with your tax adviser.

Is there a tax-free allowance for rental income?

There is no specific landlord's allowance. Only the general income tax basic allowance applies to your total taxable income; it is adjusted regularly, so check the current amount. For employed people, salary usually already uses it up. There is also a €520 annual de minimis threshold, but only for temporary letting income, not ongoing rental arrangements.

What expenses can I deduct as a landlord?

Deductible rental expenses include loan interest, depreciation (AfA) on the building portion, management fees, maintenance and repairs, travel, bank account fees, tax advice, operating costs that cannot be passed on to tenants, and vacancy costs where an intention to let remains. Complete records and receipts are essential for every item to be recognised.

Can I deduct loan principal repayments?

No. Only the interest portion of your instalment is deductible, not principal repayments. Repaying principal reduces your loan and builds your own assets; it is tax-neutral. As the interest share of an annuity loan decreases over its term, the deductible amount falls each year. Your bank's annual interest statement is the relevant record.

What is the difference between maintenance expenditure and construction costs?

Maintenance expenditure preserves the existing condition — for example, repairing heating or replacing windows — and is immediately deductible; larger maintenance expenses can be spread over two to five years. Construction costs create something new or extend the building and are deducted only through depreciation. Important: if net repair and modernisation costs within three years of purchase exceed 15% of the building acquisition costs, they are treated as acquisition-related construction costs and can likewise only be depreciated.

Letting property: taxes & deductible expenses • Loro

By Loro Real Estate team · Last updated: July 2026

When you let a property, the tax office becomes a silent participant: rental income is taxable. The good news is that landlords can offset a wide range of expenses, from loan interest and depreciation to repairs. Knowing and documenting these deductible expenses often means paying tax on much less than the gross rent might suggest. This guide explains the basic tax treatment, whether an allowance exists, which costs you can deduct and the common pitfalls.

A note before we begin: tax law changes regularly. Check all rules and amounts against the current position and discuss your circumstances with a tax adviser. This article provides context, not individual advice.

The basic principle: income from letting and leasing

For tax purposes, rent is income from letting and leasing. It is declared in Schedule V of your income tax return, separately for each property. Tax applies to the surplus, not the rent itself: deduct allowable expenses from income, and only the result enters your taxable income.

That result is subject to your personal income tax rate, added to salary and other income and taxed together. There is no flat tax rate for rental income. The key rule for landlords follows: the more completely you record allowable expenses, the lower your taxable rental income. It pays to know each item and keep evidence from the outset.

Tax on rental income: is there an allowance?

The short answer: there is no special landlord's allowance. Contrary to some rumours, rental income belongs in your tax return from the first euro.

The basic income tax allowance does apply to all taxpayers: total taxable income remains tax-free up to this threshold. It is regularly adjusted, so check the current figure. For employed landlords, salary usually already uses up the allowance, meaning rental surpluses are fully included in taxation.

There is also a €520 annual de minimis threshold: income from temporary letting, such as briefly subletting a room, may remain tax-free up to this amount. This rule does not apply to the ongoing letting of an investment property.

Deductible rental expenses: the list

Deductible rental expenses are all expenses incurred because of letting. They directly reduce taxable income. The main items include:

Loan interest on property financing — but not principal repayments (more below). Incidental financing costs also count as deductible rental expenses.
Depreciation (AfA): The building portion of the purchase price is depreciated over its useful life. Our guide explains how depreciation works: Property depreciation (AfA).
Management costs, such as building management and management of individual units.
Maintenance and repairs on the rented property.
Travel expenses, for example to viewings, owners' meetings or appointments with tradespeople.
Bank account fees for the rental account.
Tax advice fees, insofar as they relate to letting.
Operating costs not recoverable from tenants, which you bear as the owner.
Vacancy costs, as long as a genuine intention to let remains.

Even smaller items add up over a year. Keep every receipt consistently: costs you cannot substantiate may not be recognised.

Rental deductions: interest yes, principal repayments no

An annuity loan has a constant instalment made up of interest and principal. Their tax treatment is entirely different. Interest is deductible because it is the cost of borrowed capital. Principal repayments build wealth: you repay your own loan, which is tax-neutral and not deductible.

A simplified example: your bank records annual payments of €12,000, of which €7,000 is interest and €5,000 is principal. Only the €7,000 interest is deductible. As the balance shifts over an annuity loan's term — less interest, more principal — the deductible amount falls each year. Your bank's annual interest statement is the basis for the tax return. Use your own figures in the interactive rental yield calculator to see what these deductions mean for your returns.

Deducting maintenance: upkeep or construction costs?

Repairs and modernisation generally count as maintenance and can be deducted immediately in the year paid — for example, repairing heating, replacing windows or renewing a bathroom. That makes maintenance attractive for tax purposes: the full expense takes effect immediately.

An important exception is the 15% threshold for acquisition-related construction costs (section 6(1), no. 1a EStG): if net repair and modernisation costs within three years after purchase exceed 15% of building acquisition costs, all of them are classified as construction costs and can only be depreciated, rather than deducted immediately. Pay close attention to this threshold for properties needing renovation and plan the timing of major works. The allocation of purchase price and incidental costs to the assessment basis is explained in our guide Property purchase costs.

There is also a planning option: on application, larger maintenance expenses can be spread evenly over two to five years. This can smooth the tax effect over several years rather than using it all in one.

Rental losses: offsetting other income

If deductible expenses exceed income — for example in the early years with high interest, depreciation and repairs — a tax loss from letting arises. This loss can generally be offset against your other income, such as employment income, reducing the overall tax burden accordingly.

Two qualifications matter. First, the tax office expects an intention to generate income. Permanent losses without a prospect of a long-term surplus — for example, heavily discounted letting to relatives — risk classification as a hobby activity, in which case losses are not recognised for tax. Second, losses are not an end in themselves. An investment must be economically viable; tax effects are incidental, not a reason to buy. For legitimate tax planning opportunities, see Save tax with property.

Get organised from day one: clear figures simplify your tax return

Schedule V is only as laborious as your records are disorganised. A separate property account from the outset, consistently filed receipts and complete statements cut the time needed for your return — and ensure you do not miss deductible expenses.

Professional rental management takes precisely this work off your hands, providing clear records of income, non-recoverable expenses and maintenance for you or your tax adviser to use directly. Loro Real Estate GmbH offers this individual rental management as an option after purchase — since 2018, now for over 250 clients and more than 1000 managed units across Rhein-Neckar and Hessen. If you would like a structured approach to the tax aspects of your investment, contact us with no obligation — together, we can identify the points to discuss with your tax adviser.

This article is for information only and does not constitute investment, tax or legal advice.

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Letting property and taxes: what landlords need to know