Letting property in Luxembourg: the depreciation rules that decide whether you pay tax at all

Rental income in Luxembourg is taxed as ordinary income, added to your salary and charged at your marginal rate — up to 42% before the solidarity surcharge. What makes letting viable is not the rate but what comes off before it: mortgage interest on a rented property is deductible without any ceiling, and a recent building can be written down at 4% a year.

Between those two deductions, a leveraged purchase of a new flat frequently produces a taxable result close to zero, or negative, in its early years.

What is taxed: net, not gross

The taxable amount is the net income from letting — rent received less the expenses incurred to earn it. Landlords who mentally tax their gross rent consistently overestimate the liability. The deductible costs are:

• Mortgage interest, in full. There is no ceiling on interest relating to a rented property, unlike the degressive ceilings that apply to a home you occupy yourself.
• Maintenance and repairs, as incurred.
• Insurance on the building.
• Property tax and comparable charges.
• Management and agency fees.
• Depreciation of the building — the deduction that does the heaviest lifting.

Where actual expenses cannot be established, a lump-sum deduction is available instead. In practice, keeping the invoices almost always beats the flat rate once a property needs any real work.

The interest point that costs landlords the most

Interest on a loan financing a rented property does not belong under special expenses, where the €672 combined ceiling for insurance premiums and personal loan interest would strangle it. It is deducted in full against the rental income it produces. Filing it in the wrong place is one of the most expensive routine errors in Luxembourg tax returns, and it is entirely avoidable.

Depreciation: the rates depend on when you bought

The building — not the land — is written down annually. The applicable rate is fixed by the acquisition date, which means two identical flats on the same landing can carry different allowances:

• Acquired before 2021: 6% a year where the building is under six years old, otherwise 2%.
• Acquired in 2021 or 2022: 4% a year where the building is under five years old, otherwise 2%.
• Acquired from 2023 onwards: 4% a year where the building is under five years old, limited to a maximum of two buildings, otherwise 2%.
• Sustainable energy investments: 10% a year.

Three features matter. The accelerated rate is temporary — it runs only while the building is under the age threshold, after which the allowance drops to 2% and the tax bill rises sharply even though nothing about the property has changed. The two-building cap introduced for acquisitions from 2023 deliberately limits the benefit to small portfolios. And the 10% rate for sustainable energy investment is the most generous figure in the whole regime, which is precisely the policy intention.

A worked example

Take a flat bought in 2024 for €600,000, of which €450,000 is attributed to the building and €150,000 to the land, let for €2,000 a month, financed with a €480,000 loan at 3.5%:

• Gross annual rent: €24,000.
• Mortgage interest in the first year, roughly €16,800, deductible in full.
• Depreciation at 4% on the €450,000 building value: €18,000.
• Insurance, property tax, maintenance and management, say €2,500.
• Total deductions: €37,300 against €24,000 of rent, giving a taxable result of minus €13,300.

That negative result reduces the landlord's other taxable income, which is why leveraged letting has been an effective tax shelter in Luxembourg. Note what happens in year six, though: the depreciation falls from €18,000 to €9,000 at the 2% rate while the loan is barely amortised, and the same property starts generating taxable income.

Land is not depreciable

Only the building is written down. The purchase price must therefore be split between land and construction, and the split is not a matter of preference — an unrealistic allocation is exactly the kind of item an assessment will challenge. Because land values in Luxembourg are high, the building share is often a smaller proportion of the price than owners expect, and overstating it inflates a deduction that may later be reversed with interest.

What counts as rental income — and what does not

Four situations regularly produce the wrong figure on a return:

• The deposit is not income while you merely hold it. It becomes taxable only if and when it is applied or forfeited to you, typically against unpaid rent or damage.
• Service charges recharged to the tenant are not profit. Where you collect a contribution and spend it on the same heating, water or maintenance, the receipt and the expense offset each other; the error is to declare the gross receipt and forget the corresponding cost.
• Arrears are taxed when received, not when they fall due. A tenant who pays two years of rent in one instalment produces a spike in that year's assessment, which can push other income up the scale.
• Costs during a genuine vacancy — interest, insurance, maintenance while the flat is actively being marketed — remain deductible. A gap between tenancies does not switch the deductions off.

Registering the lease

A residential lease need not be registered, but it may be, and registration attracts a proportional duty of 0.6%. Where a lease is registered with the option to charge VAT — relevant only for qualifying commercial lettings, not for housing — a fixed duty of €12 applies instead. Registration gives the lease a certain date and improves its evidential standing in a dispute, which is generally why a landlord chooses to pay the duty at all.

Furnished lettings and short lets

Letting furnished changes the composition of the deduction rather than the principle: furniture and equipment are written down over their own shorter lives, alongside the building. What does change the analysis is scale and service. Where letting is accompanied by hotel-like services and pursued with an organisation resembling a business, the income can be recharacterised as commercial profit — which brings municipal business tax into play and removes the treatment described here.

Social rental management, and the incentive to use it

Property let through an approved social rental management body benefits from a substantially enhanced exemption of the rental income, in exchange for a below-market rent and a longer commitment. For an owner whose priority is a secure tenant and minimal management rather than maximum yield, the after-tax comparison is much closer than the headline rents suggest, and it is worth running before dismissing the option.

Non-resident landlords

Rental income from Luxembourg property is taxable in Luxembourg whoever owns it. Double tax treaties allocate taxing rights over immovable property to the country where it is situated, so a French, Belgian or German resident letting a flat here files here, and relief is given at home. The deduction rules above apply in the same way.

When you sell

Depreciation reduces tax while you hold the property; the eventual disposal is governed by a separate regime keyed to the holding period, with a five-year speculative window and a half-rate thereafter. We set that out in full in our guide to capital gains on selling property in Luxembourg.

See also our guides to the full list of personal deductions, rents and prices in the Luxembourg market and renting a flat here.