How should renovation costs after purchasing a house be assessed?
After purchasing a property, extensive renovation and modernisation measures are often carried out. Such expenses are actually maintenance costs and can therefore be immediately deducted as income-related expenses if the building is rented out. However, be careful: If the costs in the first three years exceed 15% of the building's purchase price, they are added to the purchase price and may only be depreciated uniformly (§ 6 para. 1 no. 1a EStG).
When calculating the 15% limit, expenses for maintenance work, i.e. for cosmetic repairs, are not included. Furthermore, expenses incurred to make the building operational are considered part of the purchase costs and should therefore not be included in the 15% limit. Additionally, expenses that lead to a significant improvement of the property are considered production costs and should also be excluded from the 15% limit.
Note: The Federal Fiscal Court has ruled that cosmetic repairs carried out in close spatial, temporal, and factual connection with other modernisation measures in the first three years after purchasing the building are included in the 15% limit and - if this limit is exceeded - are considered near-purchase production costs. This means: The costs may not be deducted in full but only through depreciation of 2% per year as income-related expenses (BFH ruling of 14.6.2016, IX R 22/15).
Maintenance work or cosmetic repairs are actually immediately deductible as maintenance expenses and are not included in the 15% limit. However, this only applies if they are carried out in isolation and independently of other modernisation measures.
If you are not careful, classic cosmetic repairs, such as painting and wallpapering, which are actually deductible in one go, will be spread over 50 years. If you want to avoid this fatal outcome, you must ensure that your expenses remain below the 15% limit in the first three years (15% of the building's purchase price). Alternatively, you can start comprehensive modernisation only after the third year.
The above-mentioned BFH case law from 2016 has led to a deterioration (BFH rulings of 14.6.2016, IX R 25/14, IX R 15/15, IX R 22/15). Previously, expenses for cosmetic repairs were at least excluded from the 15% limit. The tax authorities therefore grant protection of legitimate expectations. Upon request, it is permitted to exclude costs for cosmetic repairs from the examination if the purchase contract for the property was concluded before 1 January 2017 (BMF letter of 20.10.2017, BStBl 2017 I p. 1447).
Building purchase costs 2018: 100.000 Euro
- Cosmetic repairs 2018: 5.000 Euro (fully deducted)
- Renovation costs 2019: 5.000 Euro (initially fully deducted)
- Renovation costs 2020: 5.100 Euro
Here, the 15% limit would be exceeded by 100 Euro. This would result in the 2015 and 2016 notices being amended and the costs only being considered through depreciation. In 2015, the landlord could still reasonably assume that the expenses for cosmetic repairs were fully deductible. However, upon request, the costs for cosmetic repairs can still be deducted immediately and excluded from the 15% limit check. Then the remaining 10.100 Euro would also be immediately deductible.
The Federal Fiscal Court has recently ruled that repair costs - despite exceeding the 15% limit - do not constitute near-purchase production costs. Rather, such costs are maintenance expenses and fully deductible as income-related expenses. This is because repair costs to rectify damage that did not exist at the time of purchase but was demonstrably caused later by the culpable actions of a third party are not to be classified as near-purchase production costs (BFH ruling of 9.5.2017, IX R 6/16).
The case: The claimant purchased a flat on 1.4.2007, which was in a defect-free condition. She also took over the existing tenancy. In September 2008, she terminated the tenancy. The tenant left the flat in a damaged condition (broken windows, mould, damaged floor tiles, water damage). Approximately 20.000 Euro were required in 2008 to repair these damages. The claimant claimed these as immediately deductible income-related expenses, but the tax office wanted to treat them as near-purchase production costs. The tax judges ruled in favour of the claimant.
Recently, the Lower Saxony Finance Court ruled that maintenance expenses are not immediately deductible even if the 15% limit is exceeded, for example, if a tenant suddenly dies shortly after purchasing a property and the flat needs to be extensively renovated for re-letting (ruling of 26.9.2017, 12 K 113/16).
The Federal Fiscal Court has recently ruled that expenses incurred before the purchase are not to be included in the 15% limit check (§ 6 para. 1 no. 1a EStG) (BFH decision of 28.4.2020, IX B 121/19).
- The case: A couple purchased a multi-family house. The agreed purchase price was to be paid by 1.1.2012 at the latest. The transfer of ownership was to take place immediately after full payment of the purchase price. Since the buyers needed to carry out extensive construction work but wanted to rent out the flats in the building as soon as possible, they agreed with the previous owners that the necessary renovations could begin before payment of the purchase price, as early as October 2011.
- They incurred costs of almost 68.000 Euro for the construction work in 2011. The 15% limit was already exceeded with these expenses alone. The tax office therefore informed the taxpayers that the expenses for the repair and modernisation of the building were to be added to the purchase costs. Consequence: no immediate deduction of the costs in 2011; instead, only an increase in the basis for depreciation (AfA). The property buyers argued that the three-year period only begins with the purchase, i.e. with the transfer of economic ownership. This is the point at which possession, risk, benefits, and burdens are transferred according to the notarial purchase contract - here with payment of the purchase price only in 2012.
- Therefore, only expenses incurred after this point are to be included in the 15% rule. The amount of around 68.000 Euro was incurred before the purchase. These expenses were preliminary income-related expenses from renting and leasing. Furthermore, a notarial purchase contract already existed, and the buyers could have brought about the transfer of possession, risk, benefits, and burdens by paying the purchase price themselves, as they did. The investments were made in agreement with the previous owners and solely in connection with the acquisition of ownership and the existing rental intention.
- The tax court followed the taxpayers' view and upheld their appeal (FG Rheinland-Pfalz, ruling of 13.11.2019, 2 K 2304/17). The BFH surprisingly quickly dismissed the tax office's appeal against this (BFH decision of 28.4.2020, IX B 121/19).
For the 15% limit check, expenses must be stated net, i.e. without VAT. There are numerous cases where the tax authorities use gross values, leading to a - slight - exceedance of the limit. But this is incorrect. Accurate calculation is therefore essential. It should also be noted that "genuine" production costs, particularly expenses for extensions, are still only considered within the framework of depreciation.
How should renovation costs after purchasing a house be assessed?
What are maintenance expenses?
Maintenance expenses include all costs for ongoing maintenance work or repairs, as well as any costs incurred from renewing or improving existing parts (e.g. windows) or systems (e.g. heating).
However, if new parts that did not previously exist are added (e.g. installation of a previously non-existent bathroom), this is not maintenance but capital expenditure, which only affects depreciation. Distinguishing between maintenance and capital expenditure can often be difficult.
If the measure costs up to 4,000 Euro excluding VAT, you can always deduct the expenses as maintenance, even if they are actually capital expenditure. However, special conditions apply during the first three years after purchasing a building.
Larger maintenance expenses can be deducted immediately as business expenses or spread over 2 to 5 years.
What are maintenance expenses?
