Acquisition-Related Production Costs for Buildings

Many newly purchased buildings that already have a few years behind them do not fully meet their owner's requirements. Consequently, repair and modernisation measures often arise for the property in connection with the acquisition. In this context, acquisition-related production costs must be taken into account in order to avoid unpleasant surprises. We explain below what this term means and which further aspects need to be considered.

Fundamentals: Acquisition-Related Production Costs

As a general rule, if expenses for repair and modernisation are incurred within three years after the acquisition of a property and these expenses exceed 15 percent of the acquisition costs (excluding VAT), they may be attributed to the production costs of the building (§ 6 Abs. 1 Nr. 1a S. 1 EStG). This means that these costs must be capitalised and depreciated over the useful life of the building. An immediate deduction as income-related expenses is therefore not possible.

Acquisition-Related Production Costs: Three-Year Period

When carrying out repair and modernisation measures, particular attention should be paid to the notable three-year time limit. If, for example, the taxpayer carries out minor renovation work at the beginning of the first year following acquisition and initially treats this correctly as immediately deductible income-related expenses, and then undertakes larger modernisation measures in the third year after acquisition, the expenses must be considered as a whole. If, when comparing the expenses with the statutory threshold, the taxpayer exceeds the 15 percent limit, these expenses must be attributed to the production costs of the building. Accordingly, the income-related expenses from the first year following acquisition of the property would be reduced by the renovation costs, as these must now be depreciated together with the building. This may result in retroactively amended tax assessments.

What Qualifies as Acquisition-Related Production Costs?

In principle, expenses for building extensions (additions, loft conversions, etc.) pursuant to § 255 Abs. 2 S. 1 HGB, as well as expenses for annual maintenance work (§ 6 Abs. 1 Nr. 1a S. 2 EStG), must be distinguished from acquisition-related production costs. The extent to which expenses for substantial improvements to the building (§ 255 Abs. 2 S. 1 HGB) must be included, on the other hand, has to be assessed on a case-by-case basis. It is often questionable whether the costs are already attributable to the production costs of the building on the merits. This ambiguity can certainly be used to the taxpayer's advantage — namely when the 15 percent threshold would be exceeded by taking certain costs into account. In such cases, it may be advisable to classify costs that may in principle be attributable to the production costs of the building as such. This gives the taxpayer new scope before reaching the 15 percent threshold, allowing the repair and modernisation expenses recognised up to that point to continue to be treated as immediately deductible income-related expenses. In practice, it was also long disputed whether cosmetic repairs (e.g. painting work) should be attributed to acquisition-related production costs. The BFH has now ruled (BFH 14.6.16, IX R 22/15) that these are generally not annually recurring maintenance works and must therefore be taken into account within the 15 percent threshold. Furthermore, all forms of classic maintenance measures can also be attributed to acquisition-related production costs. This also includes costs for remedying hidden defects that need to be addressed after purchase, as well as costs for remedying age-related defects and deficiencies.

Costs Incurred Prior to Acquisition

Expenses incurred by the taxpayer before the acquisition of the building are not attributable to acquisition-related production costs. This was once again confirmed by a decision of the BFH (BFH, decision of 28.4.2020, IX B 121/19), as the statutory wording expressly states "after the acquisition".

Withdrawal of Property from Business Assets — Not an Acquisition

If a property is withdrawn from the business assets into the private assets of the same taxpayer and subsequently renovated, this does not constitute a taxable acquisition event. Accordingly, the rules on acquisition-related production costs do not apply, and the renovation costs can be treated as immediately deductible income-related expenses.