In a letter dated 26 January, the Federal Ministry of Finance (BMF) clarified the tax treatment of building investments, thus providing more clarity in the distinction between maintenance costs and costs related to acquisition or production. The aim of the tax authorities with this letter is to ensure a simplified and secure allocation of corresponding expenses as immediately deductible maintenance expenses. Until now, this has often been associated with uncertainties and has been the subject of legal disputes. The rules that have now been published, which also incorporate current case law, ensure more transparency and thus improve tax predictability for investors.
Ulrich Creydt, tax consultant and managing director of the Ypsilon Group, explains: “In practice, the clear demarcation is particularly relevant for renovation and modernization measures that are decided shortly after the property has been purchased. Especially in such cases, the tax classification influences, among other things, the profitability calculation of a property.”
Typical renovation costs are directly deductible; new criteria for housing standards
An important new provision in the BMF letter concerns the treatment of temporary restructuring measures. The previously relevant review period for such measures will be shortened, making the measures immediately tax-deductible.
The letter also clarifies that standard energy measures such as thermal insulation, window replacement or the switch to a fossil-free heat supply do not count as acquisition or production expenses, but as immediately tax-deductible expenses.
The Federal Ministry of Finance is introducing new criteria for the classification of the standard of living, which plays an important role in the distinction between maintenance costs and construction costs. Four features are decisive: the quality of heating systems, sanitary installations, electrical engineering and windows. With the use of the term “exclusively”, the ministry underlines that additional equipment characteristics are not taken into account for this classification. The letter also makes it clear that individual projects, such as façade insulation, do not necessarily go hand in hand with an increase in the standard of living. Even the mere replacement of the heat generator, such as switching from a gas boiler to a heat pump, or replacing double-glazed windows with triple or quadruple glazed elements, does not fundamentally lead to an increase in the standard of living. By clarifying the language of the standard provisions (“above all” is replaced by “exclusively”), the Federal Ministry of Finance defines the scope and quality of the relevant criteria more narrowly, thus creating more clarity and simplification in tax practice.
“There are also tax improvements in the case of changes in the type of use: If properties are profoundly redesigned so that the newly inserted parts characterize the new use and the previous components take a back seat economically, there are production costs for a ‘different’ building,” says tax expert Creydt. A typical example can be the conversion of several apartments into a doctor’s office.
Construction costs are present when a building achieves a noticeable increase in its utility value through targeted construction measures. This applies, for example, to substantial interventions in the building structure, such as the foundation, load-bearing walls or ceilings.
Cosmetic repairs can be near-acquisition manufacturing costs
The new classification of maintenance and modernisation measures in connection with the acquisition of a property is also relevant for tax purposes. If these are made within three years of the building acquisition and the expenses incurred for this exceed a total of 15 percent of the acquisition costs of the building, they fall under near-acquisition construction costs. This includes, among other things, expenses that fundamentally improve the condition of the building or that are necessary to make the property rentable. Cosmetic repairs, such as wallpapering, painting or whitewashing the walls and ceilings, also count as near-acquisition manufacturing costs. In this context, it is irrelevant whether they are spatially, temporally and factually related to a uniform repair and modernisation of the building. Furthermore, they can also be carried out for a single apartment or commercial space.
Conclusion: If modernisation expenditure is planned in a structured way, it can be deducted directly from tax
Against this background, property owners should think even more about their project and budget planning from a tax point of view: If you implement measures in a targeted manner only after the three-year period has expired or bundle cost packages in a sensible way, you may be able to secure immediate tax deductibility. In principle, the new BMF letter increases planning security for owners in the tax treatment of typical renovation measures.
“It is helpful to document the equipment as objectively as possible before the start of the measures in accordance with the four relevant categories of heating, sanitation, electricity and windows. In this way, later discussions about a supposed standard improvement can be avoided in many cases,” advises Creydt.
