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Tax
04. Sep 2025

Acquisition-related production costs - Tax traps when acquiring property in need of renovation

Altbau mit Gerüst

Whether renovation costs related to the acquisition of a rental property are immediately deductible as upkeep expenses, or can merely be taken into account via the depreciation for the building largely depends on their classification as acquisition-related production costs within the meaning of Section 6(1) no.1a of the Income Tax Act (Einkommenssteuergesetz, EStG). Caution should be exercised, in particular, during the three-year period following the acquisition.

The distinction between upkeep expenses and production costs

In Section 6(1) no.1a EStG the legislator deems expenses to be production costs if, within three years of the acquisition, the net expenses incurred for maintenance and modernisation exceed 15% of the acquisition costs for the building. As a result, the immediate deduction as business expenses or allowable costs (as upkeep expenses) would be ruled out and the expenses would have to be spread over time via the depreciation charge for the building. The aim is to ensure that there is a distinction between general upkeep expenses and production expenses that increase the value.

The three-year period for the 15% rule 

The three-year deadline commences with the transfer of beneficial ownership within the meaning of Section 39(2) no. 1 of the German Fiscal Code, i.e., with the transfer of possession, benefits and burdens. The determining criterion is the actual implementation of the measures and not the payment of the costs. The German fiscal administration even proceeds from the assumption that measures that have been started but not yet completed within the time period should likewise be included here. The limit is assessed solely on the basis of the net amount for the measures, irrespective of a possible entitlement to deduct input tax. Within the three-year period, if expenses are incurred beyond this limit, then the legal fiction of acquisition-related production costs would directly apply.

Production costs subject to depreciation within the three-year period, too

Before applying the 15% limit, it is first necessary to check whether or not the expenses are, at any rate, production costs, for example, in the case of an expansion (extension, addition of another storey), increases in substance, or significant improvements to the level of the quality of a building. Such expenses do not fall under the upkeep expenses rule, instead they will directly increase the assessment base of acquisition-related production costs that are depreciated. Routine and regularly recurring maintenance work (e.g., servicing the heating system) should not be included here. Prior to the commencement of works, it would be advisable to document the state of the building in order to be able to comprehensibly demonstrate the distinction.

Please note

The Federal Ministry of Finance is currently reworking its 2023 Letter of Application on the distinction between acquisition costs, production costs and upkeep expenses. In the draft version of 5.6.2025, the acquisition-related production costs were also newly conceptualised.

Recommendation

The acquisition-related production costs rule frequently leads to unforeseen burdens for landlords because a considerable liquidity cost arises as a result of the long-term depreciation. Both private landlords as well as companies that acquire properties in their business assets should thoroughly examine, early on, the scope of the 15% limit and the tax consequences of any planned renovation measures.