Acquisition-related production costs for an owned apartment
Under certain circumstances, maintenance and modernisation measures will be re-characterised as production costs. The subject-matter of a recent ruling by a tax court (Finanzgericht, FG) was the question of whether or not the share of the costs for jointly held property should also be included here.
Under Section 6(1) no.1a of the Income Tax Act (Einkommenssteuergesetz, EStG), expenses would be re-characterised as production costs if, within three years of acquiring the building, maintenance and modernisation measures are carried out for which the net expenses exceed 15% of the acquisition costs for the building. It is then not possible to deduct the expenses immediately but, instead, via the depreciation charge for the building. In the case of an owned apartment, a number of particularities need to be considered and these were recently pointed out by the Hesse FG in its ruling of 18.6.2024 (case reference: 4 K 1736/19).
Generally, the crucial parameters here are the acquisition costs and the ancillary costs of acquisition for the purchased apartment and not the value of the entire building. In the case of joint ownership of communal areas and ownership of an apartment, it is accordingly the individual unit and not the entire building that is relevant. The point of reference should be the expenses incurred for maintenance and modernisation by the letting owner within three years of acquiring the apartment, including their share of the expenses for work done on the parts of the building that are jointly owned.
Example: On 1.11.2023, ‘A’ buys an apartment. The acquisition costs amount to €300,000 and thereof €30,000 relate to the land and €270,000 to the building. Following a refurbishment, the owned apartment is let out. At the start of 2024, A has the bathroom completely renovated for €29,750 and new doors installed for €11,900. In addition, he contributes €14,280 towards the cost of the roof refurbishment. In 2024, he claims the total expenses of €55,930 as immediately deductible maintenance expenses.
In the view of the Hesse FG, expenses for the parts of the property that are jointly-owned should not be disregarded. This would also contradict the simplification purpose pursued in Section 6(1) no.1a EStG because the maintenance and modernisation measures normally concurrently relate both to the property that is owned separately as well as the areas that are jointly owned. Specifically, in the case in question, the net expenses excluding VAT (€25,000 + €10,000 + €12,000 = €47,000) exceed the 15% limit of €40,500 (15% of €270,000). The total expenses thus constitute acquisition-related costs. They are therefore not deductible as allowable costs in the year in which they were paid; instead, they will increase the assessment base for the depreciation of the building from €270,000 by €55,930 to €325,930.
