Ask a tax advisor on the topic of Profit and loss statement

Reintegration of the home office into personal assets

July 26, 2013 | 50,00 EUR | answered by StB Patrick Färber

Hello,

I have a question regarding the reclassification of the home office into personal assets:

The situation is as follows:
In 2009, a house was purchased in which a freelancer set up a home office. Now, the home office is to be converted into a children's room, so it needs to be transferred into personal assets. The prices of houses have increased in recent years.

When I called the tax office, I was told to simply write off the home office with the current book values and the matter would be settled.

Can this be true? In this context, terms like hidden reserves and tax trap home office can be found on the internet.

How would the calculation look like for the following fictional example:

Purchase price including ancillary costs €500,000, share of home office 20%, so €100,000.

The share of the home office is composed in a ratio of 70:30 of building value and land value.

So, upon purchase, €70,000 were allocated to the building value and €30,000 to the land value.

After 4 years of straight-line depreciation (2% per year), the following values are in the books:
Building share €64,400 and land value €30,000.

Therefore, if I were to follow the tax office's suggestion and write off the home office at the remaining book value, I would write off €64,400 for the building share and €30,000 for the land value. Or is there a mistake here?

However, if I were to use the current value of the building, the situation would look different due to the increased property prices. First, the market value would need to be determined. How is this done? Do I need to obtain an appraisal or is there an accepted procedure by the tax office?

I found the broker formula as one approach. The neighboring building is currently rented out for €1,700/month, which corresponds to an annual rent of €20,400. Assuming management costs of €50/month, the profit would be €19,800. With an assumed return of 4%, the estimated market value would then be €495,000, of which €99,000 would be allocated to the home office. If this is then divided in a 70:30 ratio, the building share would be €69,300 and the land share €29,700.

Therefore, this would result in a profit of €4,900 for the building share (= €69,300 - €64,400), and a loss of €300 for the land share (= €29,700 - €30,000).

If I were to use a slightly higher assumed return instead of 4%, the profit would be lower.

Now, my question is how to proceed with the reclassification of the home office:
1) Can I rely on the statement from the tax office?
2) If not, is the broker formula an accepted method to determine the value, and if so, what interest rate should I use, given that the property location is Munich. In texts about the broker formula, one often finds something between 4% - 5%.

My goal is to dissolve the home office in a way that minimizes additional taxes; my goal is not to decrease the building value so much that I can book a loss in the end and profit from the reclassification.

Additionally, I want to avoid lengthy discussions and appraisal costs.

I would appreciate it if you could assist me with this matter.

Thank you.

StB Patrick Färber

Dear inquirer,

I would like to answer your inquiry within the scope of an initial consultation as follows:

Question 1) Statement from the tax office

It is alarming to receive such information from the tax office.

The reclassification of the room must be classified as a withdrawal, which must be valued at the fair value (= market value of the proportionate land/building part).

However, this assumes that the room was essentially business assets. This is usually the case (for owners!) as the room was used for business purposes for more than 50% of the time (area in square meters of the home office to total building area).

Now comes the so-called "trap" of the home office.

In the event of a withdrawal/abandonment of the business, the appreciation (hidden reserve) of the home office must also be taxed. This is calculated as the market value minus the book value.

Your consideration and calculation with the market value is correct.

In your example, the following "escape clause" does not apply, but it should be noted in accordance with § 8 EStDV (self-operated real estate of subordinate value).

If the annual market value of the home office (land/building) does not exceed 20,500 EUR AND (cumulatively!!)
the area of the home office is less than 20% of the total area, then you have the option not to treat this home office as business assets. If the house/apartment is jointly owned, this only applies to half of the co-ownership share. In theory, this calculation would have to be done and checked every year.

2) Valuation

For the determination of the market value, the tax office would rely on the methods mentioned in the ErbSt/BewG (inheritance tax and gift tax law). (income approach, cost approach, sales comparison approach depending on the type of property).

In your example, you have presented a type of income approach.

However, it can also be determined from recent sales in the area. For simplification purposes, I would first try to obtain an approximate market value (appraisal committee, real estate agent). If there are concerns about the appreciation with the approximate calculation, it may be advisable to try a "brief assessment" from a real estate agent. At the same time, you can calculate the appropriate valuation method (as mentioned above).

If the tax office takes up this case and there are significant taxes to be collected, it will definitely review a real estate agent's appraisal and conduct its own calculation (as mentioned above). Therefore, it is advisable to have something in hand at that time (withdrawal) that proves the value. Subsequent valuations are always difficult...

I hope I was able to answer your question. Feel free to contact me if you have any further questions!

Best regards,
Patrick Färber
Tax Advisor
post@richtig-gegensteuern.de