Deductibility of home ownership
July 27, 2009 | 20,00 EUR | answered by Michael Herrmann
Dear Sir or Madam,
I have a question regarding the deductibility of costs for a property.
I have purchased a condominium in Berlin, am currently renovating it, and intend to rent it out furnished from September of this year. I would like to deduct the acquisition, incidental purchase, and furnishing costs for tax purposes.
Due to a professional perspective, there may be a possibility of occupying the apartment myself from July 2010 to July 2011. How would this affect the tax benefits? Can the tax benefit be retrospectively lost and how would the benefits change after personal use and future rental in subsequent years?
Thank you for your response,
Dr. C. Eggers
Dear questioner,
First of all, thank you for your inquiry, which I would like to answer based on the information provided and in the context of your initial consultation. The response is based on the facts presented. Missing or incorrect information about the actual circumstances can affect the legal outcome.
By renting out the apartment, you generate rental income according to § 21 of the Income Tax Act (EStG). While the income from rental and leasing is taxable, ultimately the income (§ 21 EStG) is what is subject to taxation after deducting advertising costs. Unfortunately, there is no flat advertising cost allowance for rental income.
For rental income and charges, the principle of income accrual applies for tax purposes: income is taxable in the year in which it is received (§ 11 EStG). The period for which the money is paid generally does not matter. Exceptionally, regularly recurring payments around the turn of the year are to be allocated to the year to which they belong economically (§ 11 para. 1 sentence 2 EStG).
A significant item among deductible advertising costs is building depreciation: this is a portion of the acquisition or production costs of the building (depreciation for wear and tear, AfA). The acquisition or production costs are distributed over the useful life of the building and considered as advertising costs each year with the corresponding annual AfA.
However, depreciation is only possible for the acquisition or production costs of the building, not for the acquisition costs of the associated land. This is because only the building physically wears out during its use, while the land represents a non-depreciable asset.
If you renovate or modernize a building, the costs generally represent "maintenance expenditure," but they can also be considered as "production expenditure." The distinction is very important:
- Maintenance expenses are expenses for the ongoing maintenance and repair as well as the modernization of the building. This involves the renovation and renewal of existing building parts. It is irrelevant if the building is adapted to technological progress. The goal is to maintain or restore the usability and functionality.
Maintenance expenses can be fully deductible as advertising costs for rental income in the year of payment.
- Subsequent production costs represent extensive construction measures after the year of completion or acquisition, by which the building is enhanced in its substance, altered in its essence, or substantially improved beyond its previous state. Here, something new, not previously existing, is created.
Subsequent production costs must be added to the original acquisition or production costs. Further depreciation is calculated based on the total amount and done with the applicable percentage.
When renting a furnished apartment, expenses for furnishings such as furniture, carpets, curtains, or a fitted kitchen can be deducted as advertising costs.
- If the acquisition costs do not exceed 410 EUR (excluding VAT), you can deduct them in full as advertising costs (so-called immediate depreciation).
Immediate depreciation is only possible for independent assets that are also "independently usable" (§ 6 para. 2 EStG). An item is not independently usable if it can only be used together with other assets.
If the acquisition costs exceed 410 EUR (excluding VAT), they must be spread linearly over the expected useful life, i.e., "depreciated." Each year, the so-called "depreciation for wear and tear" (AfA) can be deducted as advertising costs. The basis for depreciation is the acquisition costs including VAT.
From the point of self-use, the costs cannot be deducted anymore, as there is no intention to generate income. Therefore, the deduction volume for assets that have not been fully depreciated is lost from this point onwards. The issue of maintenance expenses deducted in this year is also problematic. If the tax office concludes that the renovation was primarily for the slightly later self-use, this amount can be retroactively removed from advertising costs. For tax reasons, it is advisable to postpone self-use for as long as possible and not to initially limit the lease contract.
I hope this information gives you a sufficient overview of the situation and remain
Yours sincerely
Michael Herrmann
Dipl.-Finanzwirt (FH)
Tax Advisor
