LUXURY PROPERTIES IN THE SPOTLIGHT – NEW RESTRICTIONS ON INCOME TAX DEDUCTIONS FROM 2026

9. December 2025

The German government recently agreed on a comprehensive anti-fraud package. On 21 November 2025, the government bill on the tax section of the 2025 Anti-Fraud Act was published. Of particular relevance to the real estate industry are significant restrictions on input tax deduction for high-priced residential properties.

Under current law, the (commercial) letting of real estate is generally exempt from VAT, with one significant exception: letting for residential purposes is subject to 10% VAT. However, this exception will no longer apply in future if the property is a ‘particularly prestigious property’. According to the legislator, this is the case if the acquisition or production costs of a residential property – including ancillary buildings – exceed EUR 2 million within five years. In the case of apartment buildings, the costs per individual rental property are taken into account.

For these properties, the option of tax liability pursuant to Section 6 (2) UStG will be excluded in future. The result: the rental is mandatorily non-genuinely tax-exempt – input tax deduction for acquisition, production and running costs is completely eliminated.

The new provisions are to apply to transactions carried out after 31 December 2025 (i.e. from 1 January 2026). In addition, the property must have been acquired or constructed after this date.

Practical tip: Owners and project developers should check at an early stage whether their projects exceed the cost threshold. The loss of input tax deduction can have a significant economic impact, particularly in the case of high-value property development projects and luxury segments. Timely tax planning is therefore essential.