How are renovation costs treated for tax purposes?
October 16, 2023 | 40,00 EUR | answered by Lorenzo Hartmann
Dear Tax Consultant,
my name is Marco Zellmann and I have been renting out an apartment in Munich for several years. This year, I had extensive renovation works carried out in the apartment to make it more attractive to potential tenants. The renovation costs amounted to a total of 15,000 euros and included the renewal of the bathroom, the replacement of the flooring, and painting work.
Now I am wondering how these renovation costs will be treated for tax purposes. I am wondering if I can deduct the costs in full as advertising expenses, or if they need to be spread out over several years. I am also concerned about whether I may have to pay taxes if I deduct the renovation costs.
Can you please explain to me how renovation costs are treated for tax purposes in rental properties and what options there are to claim these costs in a tax-optimized way? Are there specific requirements that need to be met for the renovation costs to be fully deductible? And what are the implications if the renovation costs need to be spread out over several years?
Thank you in advance for your help and support.
Sincerely,
Marco Zellmann
Dear Mr. Zellmann,
Thank you for your inquiry regarding the tax treatment of renovation costs in the context of rental and leasing. I would be happy to explain the various ways in which you can claim renovation costs for tax purposes.
In general, renovation costs incurred in the course of renting or leasing properties are deductible as operating expenses. This means that you can declare the costs incurred for the renovation of your apartment in your tax return to reduce your tax burden.
In your case, the renovation costs amount to a total of 15,000 euros. These costs can usually be fully deducted as operating expenses, provided that they are directly related to the rented apartment. This includes, for example, the renovation of the bathroom, replacement of flooring, and painting work.
However, there is a special consideration to be made if the renovation costs represent an improvement in the property's substance. In this case, the costs must be depreciated over several years, as they cannot be immediately claimed as operating expenses. An improvement in substance occurs when the renovation serves to significantly increase the utility value of the apartment.
Whether the renovation costs must be treated as immediately deductible operating expenses or depreciable improvements in substance depends on the nature and extent of the renovation work. If the renovation costs must be treated as improvements in substance, they will be depreciated over the useful life of the improved substance, usually over several years.
It is important that you carefully keep all receipts and invoices for the renovation costs and declare them in your tax return to accurately prove your expenses. If you are unsure whether the renovation costs are deductible as operating expenses or must be depreciated, I recommend seeking advice from an experienced tax advisor.
I hope that this information has been helpful to you. If you have any further questions, please feel free to contact me.
Sincerely,
Lorenzo Hartmann
