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Construction costs or maintenance expenses for property that is rented out?

During periods of low interest rates and inflation, property is a sought-after investment. For tax optimisation, the question to be considered is how the costs of a rental property may be offset in order to reduce the tax liability – as acquisition and construction costs, or as immediately deductible maintenance expenses?

If acquisition and construction costs are attributable to the building then these would have to be apportioned over the useful life of the property. In most cases, the depreciation charge that can be offset annually against tax only accounts for 2% of the costs. By contrast, landlords are able to immediately deduct their maintenance expenses for the year in which they were paid and thus reduce their tax liability. This includes costs that do not change the character of the building, keep the building in good order and occur at regular intervals and are anticipated.

The Federal Fiscal Court (Bundesfinanzhof, BFH), in its ruling of 8.12.2021 (case reference: IX B 81/20), recently reaffirmed that the distinction between construction costs and maintenance costs has been made sufficiently clear in supreme court case law and that there are thus no grounds for refining this any further. Moreover, the rules governing acquisition-related production costs likewise have to be complied with. Within three years after a house has been purchased, if costs are incurred in connection with maintenance or modernisation that (without VAT) exceed 15% of the building acquisition cost then these costs will be retroactively recharacterized as construction costs so that they can only reduce the tax liability via depreciation. 

Please note: If these costs have been immediately deducted as maintenance expenses then the local tax office would potentially reverse this.

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