2 min read
06.09.2023

Renovation upon purchase: costs immediately tax deductible

Bright, empty room with white walls, wood floors, and a large window. A potted plant sits on the windowsill above a radiator. Outside, a building is visible.

At the moment, many multi-family buildings on the market are in need of renovation. Anyone investing in such a rental property typically factors in, at the time of purchase, the additional costs for improving insulation in the units or replacing the heating system. “However, this additional burden can, under certain circumstances, be reduced through an immediate tax refund,” explains Jürgen Lindauer, Director in the Tax Services practice at the audit and advisory firm KPMG.

The timing of the renovation matters

Two conditions apply. First, the maintenance measures must amount to at least 15 percent of the building’s acquisition cost, excluding VAT. Second—and this is the key point—the renovation work must be carried out before the contractually defined tax acquisition date. “In that case, the costs are not classified as acquisition-related production expenses that must be depreciated over the full useful life of 50 years,” explains Lindauer. “Instead, the renovation expenses can be claimed immediately as deductible income-related expenses for rental income.”

And this pays off quickly. Lindauer offers an example: “If a multi-family building is renovated for 100,000 euros, the investor could depreciate 600 euros per year for 50 years, or—at an average tax rate of 30 percent—receive an immediate tax refund of 30,000 euros if the renovation work is carried out early.” The decision is likely to be an easy one for most investors.

Rhineland-Palatinate tax court ruling is legally binding

This tax tip is based on a ruling by the Rhineland-Palatinate Tax Court dated November 13, 2019 (2 K 2304/17). The case: In the notarized purchase agreement, the parties stipulated that the transfer of benefits and burdens—essentially the tax-relevant transfer of ownership—would take place only upon payment of the final installment. In accordance with the agreement, the buyer carried out extensive renovation work even before paying the final installment.

While the tax office argued that the renovation costs had to be depreciated over 50 years as maintenance-related capital expenditures, the Rhineland-Palatinate Tax Court disagreed. It ruled that the costs were immediately deductible income-related expenses that must be recognized in rental income. The ruling is legally binding.

Tax expert Lindauer offers another practical tip: “Instead of claiming the maintenance expenses immediately, it is also possible to spread them over a period of five years. In some cases, this may be even more advantageous.”