Landlords of particularly prestigious flats, pay attention – significant changes are coming from 2026

With effect from 1 January 2026, one of the most significant changes in real estate taxation in recent years will come into effect: the introduction of a mandatory exemption from sales tax for the rental of so-called particularly representative properties ("luxury properties") for residential purposes. This change represents a paradigm shift – especially because it will no longer allow the deduction of input tax for luxury properties when renting out residential properties.

Such a particularly representative apartment is present when the following costs, after purchase or the start of production, amount to more than €2,000,000 (excluding VAT) within five years:

• Purchase cost,
• Production costs,
• expenditures subject to activation obligation,
• Costs of major repairs.

In buildings with multiple residential units (e.g., apartment buildings), it is not the building as a whole that is relevant; rather, the individual rental property – a cost allocation that is appropriate to the circumstances – must be determined on a case-by-case basis, usually by residential area – this requires a separate calculation of the total costs. If the €2 million threshold is exceeded and a particularly representative property is present, then renting it out is strictly prohibited without being exempt from tax. This means that, on the one hand, no sales tax may be charged on the rent; on the other hand, no input tax deduction is possible for acquisition, construction, and ongoing expenses. Furthermore, there is no option to opt out of tax liability.

This change ends a previously common model: the construction of high-quality residential properties by companies (e.g., GmbHs) with a pre-tax deduction and subsequent rental to shareholders. Even a non-customary rental will no longer result in a pre-tax deduction for luxury properties from now on. The new regulation applies exclusively to properties acquired or manufactured from January 1, 2026 onwards. For properties acquired before that, the current system remains in effect – the rental for residential purposes is subject to tax (10% % VAT), the pre-tax deduction for construction costs remains in place.

Example: A villa will be purchased and rented for €2,700,000 in 2026. Renting is tax-free; no input tax can be deducted for the purchase.

If additional costs (e.g., due to renovations, expansions, or outbuildings) cause the property to exceed the luxury threshold, the rental will be tax-free from that point onwards. This results in a pre-tax adjustment under § 12, Paragraph 10/11 of the Value Added Tax Act for pre-taxes already claimed in previous years. Repair costs due to natural disasters are not taken into account during the border check.

Example: Purchase in 2026 at €1,800,000; renovation in 2027 at €250,000: the costs exceed the limit; rental from 2027 is mandatory without tax relief; a pre-tax adjustment for 2026 is necessary; no pre-tax deduction for renovation costs in 2027 can be claimed.

The introduction of the mandatory false sales tax exemption for particularly representative residential properties marks a clear change in tax policy direction. The threshold creates an objective, clearly manageable criterion that significantly restricts the tax planning options for luxury properties.

In particular, for high-quality residential projects, sufficiently accurate cost accounting and documentation are required in the future to ensure compliance with the €2 million limit within the 5-year observation period, or to allow for a corresponding adjustment to the pre-tax deduction. For rentals to close relatives, a rental arrangement with a third party is no longer sufficient to secure the pre-tax deduction. Companies and real estate investors are therefore well advised to carefully calculate future projects and factor in tax implications early in the investment decision-making process.

Image: © Adobe Stock - Aris Suwanmalee