After fierce criticism, the Federal Cabinet is withdrawing its plans, according to which only publicly appointed and sworn experts may prepare real estate residual value appraisals. Furthermore, experts who do not have this IHK approval, but meet other quality requirements, are allowed to carry out the tax-relevant building analyses. If the intentions had become reality, the number of experts would have been reduced by two-thirds: from 4,000 to just over 1,000.
“However, it can be assumed that the tax authorities will look for other ways to limit the number of cases in which real estate buyers achieve a higher tax depreciation by means of residual useful life reports. This is because checking ties up resources at the tax offices; Tax revenues are shifted to the future or are lost altogether,” explains Ulrich Creydt, tax consultant and managing director of the Ypsilon Group.
The rule states: If property owners can prove with an appraisal that the remaining useful life of their building is below the legally fictitious period of 50, 40 or 33 years, they can apply shorter remaining useful lives for the assessment of depreciation: instead of two or three percent, this sometimes allows significantly higher percentages for depreciation. All property owners benefit from this: from private individuals to institutional investors.
Tax consultant Creydt recommends that real estate buyers check in the due diligence phase and in consultation with their advisors whether a higher depreciation is realistic and, if so, to commission a residual value appraisal as soon as possible. The appraisal should be part of the overall tax concept. “Because higher depreciation is not always synonymous with greater tax savings. Tax losses are often incurred in the initial phase of a real estate investment. Increasing these through higher depreciation does not necessarily make sense,” says Creydt.
It can make sense to use depreciation volume in later assessment years
Although tax losses can be carried forward and thus used in later assessment years, it may be advisable to choose a low, legally prescribed depreciation rate in the early years. This is especially true for individuals who are subject to a progressive income tax rate. In addition, the gradual reduction of the corporate tax rate means that clean depreciation planning as part of the overall tax concept is becoming more important,” the tax expert continues.
If an appraisal is not already prepared during the sales phase, the property owner can have one prepared at a later date, ideally before the next tax return. The costs for the preparation of the residual value appraisals are tax-deductible as business expenses or income-related expenses.
In the future, the Federal Ministry of Finance could try to prevent the higher depreciation rates in other ways, for example by reviewing the expert reports more closely. If it is recognised at a later date that the reason for a special or increased depreciation no longer applies because the building can be used beyond the time determined by the expert, a tax-effective write-up could be made to the value that would result from a regular two or three percent depreciation. Tax savings in the past would thus be converted into tax payments in the present.
Measures to extend the period of use could be examined more closely in the future
Property owners must inform the tax office if they have carried out work to extend the use of the property and thus the original statement of the appraisal changes. Whether everyone recognizes and implements this is questionable. “This provision should be taken seriously. In the future, it is to be expected that the tax authorities will take a closer look at building adaptations that extend the useful life. After all, that would be easy for the tax authorities, because the expenses for modernization measures end up on the desk of the tax offices because the property owners usually claim them for tax purposes,” says tax expert Creydt.
