Under a new BFH decision of 9 May 2017, Az. IX R 6/16, a landlord's expenses for repairing damage caused by the tenant after acquisition of the rented property may be deducted directly as income-related expenses.
Background:
As a general rule, expenses incurred on a building within the first three years after acquisition of a property must be added to the acquisition costs as subsequent acquisition costs (and are thus only deductible via depreciation) if they exceed 15% of the acquisition costs (excluding VAT). This is often highly frustrating for landlords, as the costs can then only be claimed for tax purposes through depreciation, which amounts to only 2% of the acquisition costs per year for the building (= 50-year useful life of the building).
Current ruling:
In its recent decision, however, the BFH has now ruled that such expenses may be deducted immediately for tax purposes if the tenant caused the damage. In the case at hand, the landlord had acquired a condominium in 2007 which was free of defects at the time of acquisition. The tenancy of the previous tenant was taken over by the claimant (= landlord); however, the tenant was given notice after she refused to pay the ancillary costs due in the following year. After the tenant had moved out, the rented apartment showed considerable damage: smashed windows, destroyed floor tiles, a burst pipe not reported to the landlord (resulting in consequential damage), and mould caused by improper ventilation.
The landlord had to have the damage repaired in order to be able to re-let the apartment. In 2008, this gave rise to total costs of approximately EUR 20,000, which she claimed in her income tax return as immediately deductible maintenance expenses. After the tax office refused the deduction on the grounds that this constituted so-called "acquisition-related production expenses", since the total costs exceeded 15% of the total acquisition costs of the apartment and the acquisition had taken place less than three years earlier, the landlord brought an action before the Finanzgericht Düsseldorf, which ruled in her favour. The tax office, however, appealed against this judgment to the BFH.
The BFH has now sided with the view of the Finanzgericht, reasoning that the landlord had no influence over the matter and that damage had demonstrably been caused by the tenant's culpable conduct.
This ruling is highly relevant in practice. We therefore recommend carefully examining whether expenses on a rented property are being incurred because the tenant has caused damage.
Frequently asked questions
Frequently asked questions
Are damages caused by the tenant immediately deductible as income-related expenses?
Yes. Under the BFH ruling of 09.05.2017 (Az. IX R 6/16), expenses for repairing damages culpably caused by the tenant after the acquisition of the rental property may be deducted immediately as income-related expenses from rental income. The 15% threshold for acquisition-related production costs does not apply in this case.
What are acquisition-related production costs for rented properties?
Expenses for repair and modernization measures incurred within three years of acquiring a property that exceed 15% of the building's acquisition costs (excluding VAT) qualify as acquisition-related production costs (anschaffungsnahe Herstellungskosten). They are not immediately deductible but instead increase the depreciation base and therefore only reduce taxable income through annual depreciation (AfA), typically at 2%.
Why does the 15% threshold not apply to tenant-caused damages?
The BFH justifies the exception on the grounds that the landlord cannot influence such damages and that the expenses are not connected to the acquisition. The prerequisite is that the tenant's culpable conduct can be proven and that the property was free of defects at the time of acquisition.
What evidence should landlords secure in cases of tenant-caused damage?
Landlords should document that the property was free of defects upon acquisition (e.g., handover protocol) and that the damage only occurred during the tenancy due to culpable conduct by the tenant. Suitable evidence includes photos, handover and move-out protocols, contractor invoices, and witnesses, in order to claim an immediate deduction as income-related expenses (Werbungskosten) before the tax office.
What types of damage were involved in the BFH case?
The case concerned shattered window panes, destroyed floor tiles, an unreported pipe burst with consequential damage, and mould caused by improper ventilation. The remediation costs of approximately EUR 20,000 could be deducted immediately as maintenance expenses, despite exceeding the 15% threshold.