Ask a tax advisor on the topic of Real estate taxation

Conversion of business assets into personal assets

July 28, 2010 | 30,00 EUR | answered by Dipl.BW/SB Ulrich Stiller

Issue:
Ten years ago, I designated the ground floor of my house as an office for my business and included it in my company assets. This means that I am able to depreciate a portion of the building costs and deduct operating expenses, etc. However, I no longer need an entire floor for my office. Therefore, I am considering moving my office to the attic and renting out the ground floor by the end of the year.

Question:
How can I remove the ground floor from my company assets? Do I need to have the value appraised and pay taxes on any profit, or is any profit after 10 years tax-free, or can I simply no longer deduct it and rent out the ground floor as a private landlord from 2011 onwards?

I recently read:
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Tax issues often arise when an asset leaves the company assets. This is because there may have been so-called hidden reserves formed during the time the asset was part of the company assets, due to the market value of the asset being higher than its remaining book value in the asset register. These reserves are then taxed when the asset leaves the company assets, which can be costly for the business owner.
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Based on this, I assume that I would have to pay taxes on the current value minus the book value in order to remove the apartment from my company assets. I estimate this could cost me around 6,000 to 10,000 euros, making the whole process hardly worth it for me. This raises two questions:
1) Can I determine/set the value myself, or do I need to have a valuation report prepared?
2) How/where do I need to report this in my tax return?

I also read:
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Rooms used for internal business purposes are considered necessary company assets and can be continued as optional company assets when subsequently rented out for business or residential purposes. If there is a change in use of a building part from internal business use to external rental, there is no mandatory removal (Federal Fiscal Court ruling of 10.11.2004, XI R 31/03, BStBl. 2005 II p. 334).
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This would mean that I could simply rent out the apartment and keep it as part of my company assets. What do I need to consider in this scenario? Would I potentially need to charge VAT on the rent? This would not be acceptable for the tenant if the apartment is rented out as a private residence.

What, in your opinion, is the best solution?

Dipl.BW/SB Ulrich Stiller

Dear inquirer,

Thank you for your inquiry, which I would like to answer based on the information you provided and in the context of your use within an initial consultation as follows:

Plots of land and parts of land that are used exclusively and directly for the operational purposes of a taxpayer generally constitute necessary operating assets. Therefore, the upper floor (EG) represents necessary operating assets for you.

If the ground floor (DG) should be the same size as the upper floor (EG), there will be no change in terms of taxation, as the spatial relocation of your plot of land part used for business purposes on the property does not result in a withdrawal gain, even if the rooms previously used are subsequently used for personal, private residential purposes (see FG Düsseldorf rkr judgment of 19.10.1993 EFG 1994 p. 346). If, for example, the DG is 20% smaller than the EG, then a taxable withdrawal gain arises in the amount of a 20% share.

The BFH judgment of 10.11.2004 mentioned by you does not apply to you, as there was a part of the building rented out for private residential purposes, belonging to private assets, and the former office should also be rented out for foreign residential purposes.

The withdrawal value is the fair value, i.e. the market value, which should be determined by a valuation report for security purposes towards the tax office.

You must have a tax advisor review and process the matters so that there are no tax disadvantages due to the change in use. Therefore, my response can only serve as a guideline for further action.

Sincerely,

Ulrich Stiller
Tax advisor/Dipl. Business Administrator