As a landlord in Germany, high renovation costs are often inevitable. The key question for tax purposes is whether these expenses qualify as maintenance costs. Here’s a guide to help expats navigate this aspect of property ownership.
Full Deduction for Renovation Costs
Whether it’s a new heating system, a modern bathroom, or facade insulation, landlords can fully deduct renovation or modernization costs from their taxes. This includes minor repairs, such as unclogging a drain or repainting, as well as major renovations like a new roof. The critical factor is that these costs must be classified as “maintenance expenses” (Erhaltungsaufwand). Only then can they be fully deducted in the year they were paid.
Maintenance vs. Improvement Costs
If the costs are deemed “improvement expenses” (Herstellungsaufwand), they can only be deducted over several years.
- Maintenance Expenses: Defined by the Ministry of Finance as costs for renewing existing parts or facilities. For example, replacing old windows with new, double-glazed ones qualifies.
- Improvement Expenses: Costs that increase the property’s value or usable space, like adding a dormer that enlarges the living area, may be classified as improvement expenses, which must be depreciated over time.
Two Deduction Methods
Landlords can choose to:
- Deduct the full cost in the year the repair was paid.
- Spread the costs evenly over two to five years.
When to Deduct Full Costs Immediately
If you have a high income, deducting the full costs in the same year can significantly reduce your taxable rental income and lower your overall tax burden.
When to Spread Costs Over Several Years
If your income is low, spreading the costs can help keep your taxable income below the threshold, potentially eliminating your tax liability.
Specific Scenarios
Even if you sell the property before the end of the depreciation period, you can continue to deduct the annual renovation costs.
Special Consideration: Costs Exceeding 15% of Purchase Price
If renovation costs exceed 15% of the property’s purchase price within three years of acquisition, these expenses must be added to the property’s purchase price and depreciated over several years:
- 2% per year for 50 years.
- 3% per year for 33 years for buildings completed after January 1, 2023.
Additional Savings: Damage Compensation
If construction defects necessitate the renovations, you might be able to claim compensation from the previous owner, which can be deducted from the renovation costs.
Note for Tenants and Homeowners
Tenants and homeowners can only deduct a portion of their renovation costs.