Special depreciation under § 7b EStG following the re-division of a building
The structural division of a previously combined semi-detached house can create additional residential space within the meaning of § 7b EStG (German Income Tax Act). This was the ruling of the Finanzgericht Düsseldorf (Düsseldorf Fiscal Court) concerning the renewed separation of two semi-detached units, which recognised eligibility for special depreciation in principle (FG Düsseldorf, judgment of 21 July 2026 – 12 K 823/26 E).
§ 7b EStG is intended to provide tax incentives for the construction of new rental housing in the affordable rental segment. One of the requirements is that the relevant construction project create additional residential space that did not previously exist. In the case decided, the key issue was therefore which structural condition had to be used for the comparison before and after the alterations.
From two semi-detached units to one family home
Combining the originally separate units
The claimants completed the construction of one half of a semi-detached house in 1991. Ten years later, they acquired the adjoining half and connected the two parts of the building by creating openings between them. The combination, which had been approved under building law, resulted in a single dwelling used by the family of five. A joint Einheitswertbescheid (assessed value notice) was subsequently issued for both halves.
Accordingly, prior to the subsequent alterations, there were no longer two independent dwellings but a single residential property used as one home.
Renewed division and conversion
In 2020, the claimants applied for the connected parts of the building to be separated. The construction work was carried out in 2021. The existing openings were closed, and the two units were once again made legally and structurally independent.
The work also involved further alterations:
- An extension was added to the ground floor of one of the semi-detached units.
- The attic of this unit was converted.
- The separated dwelling was rented out from February 2022.
For the construction work, the claimants based the special depreciation claimed for the disputed 2021 tax year on expenses of approximately EUR 412,000. The Finanzamt (tax office) initially granted the tax benefit but later withdrew it. It took the view that the work had not created an additional dwelling for the first time.
The condition immediately before the separation is decisive
Increase in housing stock as a result of the construction work
The 12th Senate of the Finanzgericht Düsseldorf assessed the renewed division of the building differently. For the purposes of § 7b EStG, the decisive question was whether the specific construction project had increased the housing stock compared with the condition immediately preceding it. This is consistent with the standard established by the Bundesfinanzhof (BFH, Federal Fiscal Court), according to which the work must create additional residential space (BFH, judgment of 12 August 2025 – IX R 24/24).
Immediately before the separation, the connected semi-detached units constituted a single dwelling. Once the work had been completed, there were two legally and structurally independent units. In the relevant comparison, the housing stock had therefore increased by one dwelling.
Previous independence of the units not decisive
In the opinion of the Fiscal Court, the structural condition in 1991 was not the relevant point of reference. The fact that the parts of the building had already constituted independent dwellings at that time did not preclude the construction work carried out in 2021 from creating additional residential space for the first time.
The combination approximately 20 years earlier and the subsequent separation were connected neither substantively nor temporally. Nor were the two measures based on a single decision by the claimants. The previous existence of two dwellings was therefore not decisive for the relevant before-and-after comparison.
Legislative purpose supports the tax incentive
The Fiscal Court also considered the policy objective of § 7b EStG in its assessment. The provision is intended to support the creation of additional affordable rental housing. In the Court’s view, reducing the size of a larger residential unit in order to create an additional dwelling intended for rental is consistent with this legislative objective.
The application guidance issued by the Bundesfinanzministerium (German Federal Ministry of Finance) on 21 May 2025 also provides that dividing one dwelling can create several new dwellings within the meaning of § 7b EStG. The previous combination of the semi-detached units therefore did not preclude recognition of their subsequent division.
Appeal on points of law permitted
The Fiscal Court permitted an appeal on points of law. As of the relevant editorial cut-off date, there was no confirmation that the tax office had lodged such an appeal. Consequently, no decision by the Bundesfinanzhof has been issued in these proceedings.
The decision illustrates that the factual and temporal context of the relevant construction project can be significant for special depreciation under § 7b EStG. For questions concerning the tax treatment of new residential construction, building divisions and comparable investments, MTR Legal Rechtsanwälte advises companies, investors and private property owners as part of its tax law advisory services.
