BACKGROUND
Landlords can depreciate rented buildings more quickly and thus save income taxes if they can prove a shorter useful life. This no longer requires an expert appraisal of the building’s substance; an online appraisal is sufficient. The Cologne Fiscal Court thus follows the opinion of the German Federal Fiscal Court.
Owners of rented commercially used real estate can benefit for tax purposes by depreciating buildings over their useful life – normally with straight-line depreciation of two percent (residential buildings) or three percent (commercial buildings) per year.
In many cases, owners can depreciate their property over a much shorter period and claim higher annual depreciation for tax purposes. To do so, owners must be able to demonstrate a shorter remaining useful life.
CONDITIONS FOR SHORTENED DEPRECIATION PERIODS FOR A BUILDING
In principle, the German Income Tax Act (§ 7 (4) S. 2 EStG) grants the owner the right to choose whether to depreciate a building at the typified rate or to claim an actual shorter useful life by means of an expert opinion.
Remaining economic useful life of rented real estate determined by private expert opinion can be considered as the basis of the tax depreciation rate, the Münster Fiscal Court (Finanzgericht, FG) ruled in January 2022 (Case No. 1 K 1741/18 E). The new case law of the Cologne Fiscal Court (ruling of March 22 (Ref. 6 K 923/20)) also allows online appraisals and such appraisals that are limited to the useful life of a property without exception.
The Cologne Tax Court thus follows a decision of the Federal Fiscal Court (Bundesfinanzhof, BFH) of July 28, 2021 (Ref. IX R 25/19), which in summary ruled as follows:
- Pursuant to Section 7 (4) Sentence 2 of the German Income Tax Act (Einkommensteuergesetz), the taxpayer may use any method of proof that appears suitable in the individual case for providing the necessary evidence to demonstrate the shortened actual useful life of a building used to generate income. In this respect, it is necessary that, on the basis of the taxpayer’s explanations, the period during which the relevant building can be expected to be used in accordance with its intended purpose can be estimated with sufficient certainty.
- The submission of an expert opinion on the building’s substance is not a prerequisite for the recognition of a shortened actual useful life. [Until the BFH ruling, tax offices sometimes required the submission of a costly expert opinion on the building substance].
Proof of a shorter useful life in the context of depreciation will be eliminated under the Annual Tax Act 2022 (which still has to be finally approved by the Bundesrat) is expected to be eliminated from 2023.
WHAT DOES THIS MEAN FOR landlords?
For owners of a building used for income, it may make tax sense to show a shortened actual useful life of the building to save income taxes. However, this option is expected to be abolished in 2023, so owners should consider to prepare an online appraisal for the year 2022 as soon as possible to still benefit from the advantages of a shortened depreciation period.
We would be happy to support you in your decision-making process as to whether the effort required to present the shortened actual useful life is actually worthwhile. Feel free to contact us.
Source: https://datenbank.nwb.de/Dokument/873338/, Haufe
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