Deductibility of renovation costs
August 12, 2011 | 50,00 EUR | answered by Michael Herrmann
We bought a house (built in 1977) in April 2011 for rental purposes, currently undergoing renovation (otherwise it cannot be rented out). The purchase price was 167,000 euros plus real estate transfer tax, notary fees, etc. Rental is planned to start after the renovation is completed around the end of 2011/early 2012.
We will need to invest around 40,000 euros for new bathrooms, interior and exterior paint, flooring, parquet, and partial renewal of the electrical systems, as the house does not meet current standards. No financing interest will be incurred.
Question: Can the full amount of modernization expenses be deducted from rental income, or does it have to be spread out over several years (especially since these costs are incurred this year, but rental income will only be generated from 2012)? Can the house also be depreciated, with the land value deducted, and does the real estate transfer tax count as acquisition costs?
Can renovation costs be deducted this year, even if no rental income is generated yet? And if the tax owed is reduced to 0 and there are still remaining costs, can they be carried over to the next year?
Dear inquirer,
First of all, thank you very much for your inquiry, which I would like to answer based on the information provided and in the context of your involvement in an initial consultation. The response is based on the facts presented. Missing or incorrect information about the actual circumstances can affect the legal outcome.
Since acquiring the house, you have been generating rental income as the property is intended for rental. Actual rental income is not required and not possible during the renovation period. This does not prevent you from claiming your expenses as advertising costs.
Advertising costs include:
Depreciation: The acquisition costs of the building are depreciated over a period of 50 years. The annual depreciation rate is 2%. The purchase price of the land and building must be deducted from the additional acquisition costs.
Expenses for renovation and modernization measures after the acquisition of the building are considered acquisition costs if - without value-added tax - they exceed 15% of the acquisition costs of the building within three years, so-called acquisition-related production costs. They must then be added to the acquisition costs of the building and depreciated together (§ 6 para. 1 no. 1a in conjunction with § 9 para. 5 sentence 2 EStG).
Not included in the three-year period and 15% limit are expenses for maintenance work that is typically carried out annually. These are considered maintenance expenses and can be deducted as advertising costs immediately.
Typical maintenance work includes only cosmetic repairs. Cosmetic repairs eliminate defects caused by contractual use, such as wallpapering, painting or whitewashing walls and ceilings, painting floors, radiators including pipes, interior doors, windows, and exterior doors from the inside (according to § 28 para. 4 of the 2nd Calculation Regulation). Structural measures beyond this constitute repair and modernization measures.
The three-year period begins with the acquisition of the building and ends exactly three years later. It is not based on three calendar years.
If expenses remain below this limit, they are considered maintenance expenses and can be fully deducted as advertising costs.
All other costs related to the rental property are immediately deductible (property tax, electricity, etc.).
You should try to carry out renovation measures in parts after the expiration of the three-year period to avoid unfavorable depreciation.
I hope that these details have provided you with a sufficient overview of the situation within the scope of your involvement and this initial consultation.
Best regards,
Michael Herrmann
Dipl.-Finanzwirt (FH)
Tax consultant
