Depreciation on commercial properties in Denmark follows the Afskrivningsloven (Depreciation Act), where owners can generally depreciate up to 4% annually on buildings used for commercial purposes, such as warehouses, industrial facilities, or offices. The land value can never be depreciated, and certain property types, such as residential housing, are generally excluded from depreciation access.
Basic principles of depreciation on commercial property
When investing in real estate in Denmark, understanding tax depreciation is crucial for the total return. Depreciation on commercial property is essentially a recognition that a building wears out and becomes technically and economically obsolete over time. By applying tax depreciation, the investor can reduce their taxable income, which improves liquidity during the investment phase.
It is important to distinguish between accounting depreciation and tax depreciation. While accounting depreciation is determined based on an assessment of the building's expected lifespan in the company's annual accounts, tax depreciation follows fixed frameworks set out in the Danish Afskrivningsloven (Depreciation Act). For investors, this means predictability, but also a number of limitations to navigate.
In cities like Copenhagen, Aarhus, Odense, and Aalborg, we often see large portfolios of commercial properties where tax depreciation plays a central role in valuation. For an investor in a warehouse in Fredericia or a logistics property in Taastrup, the rules are the same, but the use of the building determines whether depreciation is permitted at all.
What can be depreciated?
Only buildings and installations used for commercial purposes are eligible for depreciation. This includes:
- Factory and workshop buildings.
- Warehouses and logistics centres.
- Shops, offices, and showrooms.
- Hotels and restaurants.
It is a common misconception that all properties can be depreciated. For example, you generally cannot depreciate properties used for residential purposes (private buy-to-let), offices used for certain liberal professions in specific historical contexts (though most offices are covered today), or buildings for social and cultural purposes, unless they fall under specific exceptions.
Rates and rules for depreciation on commercial property
Since 2023, the general depreciation rate for buildings has been set at a maximum of 4% per year. This is a change from previous years when the rate for certain building types was higher. By using the linear depreciation method, the acquisition cost can be depreciated over 25 years.
It is worth noting that you do not have to depreciate at the maximum rate. An investor can choose a lower rate if it fits better into their overall tax strategy, but they can never exceed the statutory limit. The choice of rate has a direct impact on the tax-related saldoværdi (written-down value), which becomes relevant the day the property is sold.
Overview of depreciation options
| Building type | Maximum annual depreciation | Notes |
|---|---|---|
| Commercial buildings (Warehouse, factory etc.) | 4% | Standard according to Afskrivningsloven |
| Office buildings | 4% | Special rules for offices connected to residential |
| Installations (Lifts, heating systems) | 4% | Often depreciated with the building |
| Land area | 0% | Land is never depreciated in Denmark |
| Conversion and improvement | 4% | Added to the depreciable balance |
Land can never be depreciated
One of the most fundamental rules in the Danish tax system is that the ground value cannot be depreciated. The logic is that land does not wear out or become obsolete in the same way as a building. When a commercial property is purchased in, for example, Hillerød or Roskilde, the purchase price must be divided into a building value and a land value. Only the building value forms the basis for the depreciation base.
This division must be made on a realistic basis. Often, the offentlige ejendomsvurdering (public property assessment) is used as a starting point, but in transactions between independent parties, the distribution in the purchase agreement will often be accepted, provided it is objective and documentable. It is always recommended to consult an accountant or tax expert here, as SKAT (the Danish Customs and Tax Administration) focuses on ensuring that building values are not artificially inflated to achieve higher depreciation.
Special rules for installations and improvements
When discussing depreciation on commercial property, it is not just the walls and roof that count. Modern commercial properties in growth areas like the Triangle Region or Aarhus Harbour are often filled with technical installations necessary for the property's operation.
Technical installations
Installations such as lifts, escalators, ventilation systems, and central heating systems are generally depreciated at the same rate as the building (4%) if they are considered an integrated part of the building. However, there are cases where equipment that is not permanently integrated can be depreciated according to the rules for machinery and fixtures (the declining balance method), which often allows for significantly faster depreciation (up to 25% annually). The line between a building installation and operating equipment can be fine and requires a specific assessment of the property.
Conversion and maintenance
There is a significant difference between maintenance and improvement of a property. Maintenance refers to expenses that keep the building in the same condition as at the time of acquisition, and these can generally be deducted directly from income in the year they are incurred. Improvements, on the other hand—such as an extension to a logistics centre in Køge or the modernisation of an office property in Copenhagen K—must be added to the depreciation base and depreciated over time at 4% per year.
Geographical and market considerations in Denmark
Although the rules for depreciation on commercial property are national, their significance varies depending on where in the country you invest. In areas with high land prices, such as Copenhagen City or Hellerup, the land value constitutes a proportionally large part of the total acquisition cost. This means the depreciable amount is relatively smaller compared to a property in, for example, Sønderborg or Skive, where the building constitutes the majority of the value.
For an investor, this means the tax benefit of depreciation is most significant in the provinces or industrial areas, where the building mass is the dominant value factor. Conversely, in major cities, there is a greater expectation of capital growth on the land, which can outweigh the smaller ongoing tax depreciations.
Lifespan of the property
If a building is so exposed to wear and tear that its lifespan is estimated to be under 25 years, permission for a higher depreciation percentage can be granted in certain cases. However, this is rarely seen with modern office builds but may be relevant for certain types of industrial plants or buildings in aggressive environments. You should seek advice from technical experts and tax advisors to document the need for increased depreciation to the authorities.
Taxation on sale: Recaptured depreciation
It is important to understand that depreciation on commercial property is not a final gift from the state, but rather a tax deferral. When the property is sold one day, you must calculate the so-called genvundne afskrivninger (recaptured depreciation).
If the property is sold at a price higher than the tax written-down value (acquisition price minus total depreciation), the depreciation you have claimed over the years must be taxed as ordinary income. This ensures that you do not get a deduction for a loss in value that has not actually occurred because the property has increased in value or maintained its price.
Example (simplified):
- A commercial property is bought for DKK 10 million (building value).
- 4% is depreciated annually for 10 years (DKK 4 million total).
- The tax value is now DKK 6 million.
- The property is sold for DKK 11 million.
- The DKK 4 million that was depreciated must now be taxed as recaptured depreciation.
- The remaining gain (from DKK 10 to 11 million) is taxed according to the rules of the Ejendomsavanceskattelov (Property Capital Gains Tax Act).
This mechanism makes it essential for investors to include future tax in their exit strategy. At PropertyInvestments, we often see professional investors reinvesting in new projects to manage their tax position, although rules regarding tax-free reinvestment have been tightened over the years.
Exceptions and limitations
Even if you own a commercial property, there are situations where depreciation is not possible. These include:
- Residential properties: As mentioned, rental properties for residential purposes are not eligible for depreciation. If a building contains both commercial and residential units (e.g., a shop on the ground floor and flats on the 1st floor), the property must be split so that depreciation is only claimed on the commercial part.
- Unused buildings: A building must be used commercially to be depreciated. If a building stands empty without being in the process of being let or used, the right to depreciation may lapse.
- Artistic decoration: There are special rules for art integrated into buildings, which often follow their own depreciation rules.
It is always up to the owner to document the building's use to SKAT. In cases of doubt, it may be necessary to request a bindende svar (binding ruling) if you are facing a very large investment with uncertain depreciation status.
The economic effect of correct depreciation
For the serious investor in Danish commercial real estate, depreciation is a tool for optimising cash flow. By reducing taxable income, the amount available for debt repayment or property maintenance is increased. In a market like Denmark, where interest rates and financing costs can fluctuate, depreciation access serves as an important buffer.
When PropertyInvestments sources properties in growth cities like Vejle, Kolding, or Greater Copenhagen, we always look at the property's potential—not just in rental income, but also in its tax profile. A property with a high building value base can be more attractive to certain types of investors than a property where most of the value lies in the land.
It must be emphasised, however, that tax rules are complex and can change through political intervention. Therefore, you should never base an investment solely on depreciation rules but see them as part of a larger economic calculation. Consultation with the Ministry of Justice or the Financial Supervisory Authority's guidelines for property trade and tax legislation via an accountant is always required.
Frequently asked questions
Can I depreciate a residential rental property?
Generally, no. Danish rules do not allow depreciation on buildings used for private residence, whether for own use or rental. However, there are exceptions for certain types of service buildings or if the property has a combined status.
What is the maximum I can depreciate on an office property?
Under current rules from 2023 onwards, the maximum depreciation rate on commercial buildings, including offices, is 4% per year using the linear method.
What happens to depreciation if I renovate?
Expenses for conversion and improvement are added to your depreciation balance. For example, if you spend DKK 2 million on a new floor in a warehouse, you can depreciate 4% of this amount annually going forward.
Do I have to pay back the depreciation to the state upon sale?
If you sell the property at a profit relative to the booked tax value, you must pay tax on the so-called recaptured depreciation. In practice, this means the deductions you have received are offset against your gain on sale.
Can I depreciate the land if it falls in value?
No, land value in Denmark can never be depreciated for tax purposes. This applies regardless of property type and geographical location, as land is considered an asset that does not wear out.
How PropertyInvestments can help
PropertyInvestments has, since 1985, helped Danish and international investors find and optimise their real estate investments in Denmark. We handle the entire process—from sourcing the right commercial property in attractive areas to preparation and the final sale.
If you are considering investing in the Danish market and want a partner who knows the practical aspects of commercial real estate, we are ready for a dialogue. We help identify properties with the right potential and ensure all factors are illuminated before purchase.
Contact us for a non-binding conversation about your investment goals at info@propertyinvestments.dk or call us on +45 31 16 31 00. We always recommend that you seek specific legal and tax advice from authorised professionals in connection with your investments.
