New Federal Ministry of Finance circular on the expenses incurred for the maintenance and modernisation of buildings
In the case of building works, a question that frequently arises is whether the costs can be deducted immediately as maintenance expenses or whether they can be capitalised and depreciated over many years. In this respect, the previous administrative principles have now been thoroughly revised and published in a new circular by the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF).
1. Background and classification
In the case of building renovations, the tax classification will determine liquidity and income. Immediately deductible maintenance expenses will reduce income in the year in which the expenses were incurred. However, if expenses are capitalised as acquisition or production costs, then the income will only be reduced over many years via depreciation. The new BMF circular of 26.1.2026 replaces the previously applicable administrative opinion of 2003 and 2017 and integrates numerous rulings by the Federal Fiscal Court. The aim is to achieve clearer and more consistent analytical classification. Here, expenses are systematically allocated to three areas:
- Maintenance expenses (generally immediately deductible)
- Acquisition costs (make ready for use) and production costs (new building, expansion, significant improvement) and
- Acquisition-related production costs (within three years of the acquisition if the so-called 15% threshold is breached).
2. The centrepiece - A standards concept for residential buildings
The BMF still distinguishes between three standard levels (very simple, medium, or very sophisticated). Here, the standard for residential buildings is evaluated solely on the basis of four key elements of the fixtures, namely:
(1) heating, (2) bathroom, (3) electrical system, (4) windows.
If at least three of these four areas are modernised at the same time and, as a result, the utility value of the building is enhanced, then this would raise the standard and, consequently, the expenses would be classified as acquisition or production costs. If at least two of these areas are modernised, then the related costs can be deducted immediately as maintenance expenses insofar as the 15% threshold - which needs to be assessed separately - has not been breached.
3. Subjectively-assigned purpose as a new assessment factor
The emphasis on the buyer’s subjectively-assigned purpose is new. If, for example, a residential building is converted into consulting rooms or office space, this alone could already give rise to acquisition costs, even if the building was previously objectively usable. Even if the technical condition remains unchanged, expenses incurred in connection with a change in the use of the building may result in production costs.
4. Acquisition-related production costs (15% threshold) - More stringent overall assessment
Expenses incurred within three years after the transfer of possession, risk, benefits and burdens will still be deemed to be acquisition-related production costs if, on a net basis (without VAT), they exceed 15% of the costs relating to the building. Moreover, cosmetic repairs (e.g., painting works) and remedying hidden defects that were not apparent at the time of purchase are now expressly included. Annual routine work (e.g., servicing the heating system) and genuine extensions must not be included.
5. Production costs due to expansion or significant improvements
The circular details when measures necessarily constitute production costs, regardless of their scope. Examples include installing a dormer window, an external staircase, a fireplace, or a sauna. Even if there is only a slight increase in the usable area, nevertheless, an extension is created and will necessarily give rise to production costs. The large number of examples included in the circular makes it much easier to classify them in practice.
6. Renovation in instalments - Three-year view
Renovations that are planned as an entire project lasting several years will continue to be considered as one single building project. However, in the future, the time period will be limited to three years (this was hitherto five years in some cases).
7. Evidential burden of proof and cooperation
In principle, the local tax office bears the evidential burden of proof for the facts that give rise to acquisition or production costs. If it is not possible to determine the original condition, then an enhanced obligation for the taxpayer to cooperate would exist. Evidence, such as,
- an extensive modernisation close to the purchase date,
- high costs in the key elements of the fixtures, or
- significantly increased rents
may indicate that the standard has been raised.
8. Recommendations
Overview
To sum up, we would recommend the following measures
- Building projects and renovation measures should be reviewed in respect of tax early on. In doing so, the individual building phases and measures should be clearly separated, planned and implemented.
- It is highly recommended to create extensive documentation of the initial condition (photos, as-built plans) as well as of the works performed.
- In the three-year period, and with regard to the 15% threshold, continuous monitoring is important.
An individual note for the practical application
Cosmetic repairs, painting works and similar measures within the three-year time limit generally have to be included in the 15% quota. Routine servicing (e.g., servicing the heating system) is excluded. In the case of prolonged projects, you should check whether a “renovation in instalments” is developing - the three-year presumption applies more quickly than previously.
Example – A residential building
A residential building, which has been standing vacant, is purchased and it is subsequently fitted out with new electrical wiring (from two-phase to three-phase), new bathrooms (previously surface-mounted fixtures and no shower available) and new windows (old windows with single glazing). Consequently, three of the four key elements of the fixtures are significantly enhanced and this would normally raise the standard. The expenses have to be treated as acquisition or production costs. Moreover, if a dormer window is installed, then the costs for this would always be production costs (extension).
When this is applied to the above example, then if the residential building, which has been standing vacant, is already fitted with insulated glass windows (no single glazing) and if these are replaced as part of the modernisation, then only two of the four key criteria of the fixtures would be satisfied (electrical system and bathroom). Provided that the 15% threshold - which always needs to be assessed separately - has not been breached, then these costs, in their entirety, would be immediately deductible maintenance expenses. If the costs of the modernisation measures exceed 15% of the acquisition or production costs (irrespective of the standards concept), then they will always be deemed to be acquisition or production costs that are subject to mandatory capitalisation.
