Refurbishment expenses that can be immediately deducted after withdrawal of a residential property
Classifying maintenance expenses as production costs would mean that the maintenance and modernisation costs would only reduce the tax liability via the scheduled depreciation of the building. It would then no longer be possible to immediately offset the costs against tax. The Federal Fiscal Court (Bundesfinanzhof, BFH), in its ruling of 3.5.2022 (case reference: IX R 7/21), considered whether or not the three-year period could also be initiated by withdrawing a residential property from business assets. In the underlying case, the claimant had withdrawn a residential property from his agricultural business assets and had subsequently completely refurbished it. In the first three years following the withdrawal, the overall cost of this came to €83,000 and the claimant offset this amount as immediately deductible maintenance expenses against his income from letting and leasing.
The local tax office took the view that the claimant was only able to amortise the expenses as acquisition-related production costs and spread them linearly at 2% per year over the useful life of the property. The claimant argued against this by pointing out that the residential property had not been acquired for consideration and the three-year period, within which acquisition-related production costs could be incurred, had thus not been initiated. The claimant was of the view that this was not a transaction that was characteristic of an acquisition.
Outcome: The BFH likewise ruled that the withdrawal of a residential property from business assets does not constitute an acquisition within the meaning of the regulations on acquisition-related production costs so that the building costs had been wrongly classified as such. An acquisition could not be presumed because the necessary consideration was not paid and there was no change in the legal arrangements inasmuch as the asset was transferred to the taxpayer’s private assets. The BFH referred the matter back to the lower court, as it still had to be clarified whether or not the building costs, based on the measurement benchmark of the German Commercial Code, could possibly come under the production costs. Should this not be the case then, from the perspective of the BFH, the claimant would be able to deduct his expenses immediately in the years in which they were paid.