# BFH on the Tax Treatment of Property Remediation

> The BFH clarifies when land remediation costs are deductible expenses or subsequent production costs for tax purposes.

Source: https://www.mtrlegal.com/en/bfh-tax-treatment-property-remediation/ · Language: en · Updated: 2026-10-29

---

The Bundesfinanzhof (BFH, Federal Fiscal Court) has clarified the tax treatment of expenses incurred in remediating land affected by mining damage ([BFH, judgment of 21 August 2026](https://www.bundesfinanzhof.de/de/entscheidung/entscheidungen-online/detail/STRE202610197/) – IX R 13/25 (case no.), ECLI:DE:BFH:2026:U.210826.IXR13.25.0). According to the judgment, measures relating to land may result in [subsequent production costs](https://www.mtrlegal.com/wiki/herstellungskosten/) if they serve to make use of the land and bring about a material improvement compared with the relevant original condition. The judgment of the Finanzgericht Münster (Münster Fiscal Court) was set aside and the case remitted for a new hearing and decision.

## Remediation of a Former Colliery Site

The claimants, who were jointly assessed for income tax, had acquired a former colliery site in 1990. The property contained a building and a decommissioned and backfilled utility shaft owned by a company.

The claimants were required to keep an area relevant to structural stability within a radius of 12.5 metres from the centre of the shaft free from buildings, vehicular traffic and material storage. While the female claimant’s interest had been held as private assets since the acquisition, the male claimant’s interest was initially allocated to the business assets of his sole proprietorship.

### Expansion of the Protection Zone Prevented Use of the Property

After the male claimant relocated his business premises at the beginning of 1998, the property was no longer used for his own business operations. Nevertheless, his co-ownership interest remained part of his business assets.

A geotechnical report prepared in 1997 concluded that the protection zone relevant to structural stability had expanded to a radius of 32.55 metres. This affected substantial parts of the paved area accessible to vehicles as well as the existing building. As a result, neither the owners nor third parties could use the property for business purposes, and no further construction work was possible.

The claimants intended to restore the property so that it could once again be used for commercial purposes involving heavy equipment. In 2009, an engineering firm developed a remediation plan, which was not initially implemented.

### Remediation and Planned Letting

In 2018, the claimants agreed with the owner of the utility shaft that the company would contribute to the remediation costs. Once the work had been completed, several buildings were to be constructed on the property and let.

As at 31 December 2018, the male claimant transferred his co-ownership interest from his business assets to his private assets. Both claimants maintained their intention to generate rental and leasing income after the property had been developed.

The remediation was carried out in 2019. This made it possible to use the property again in a manner comparable to its condition when it was acquired in 1990. The owner of the shaft contributed to the costs in accordance with the agreement.

## Tax Office Treated the Expenses as Production Costs

The claimants claimed their share of the remediation costs as income-related expenses against their rental and leasing income. The Finanzamt (Tax Office) initially accepted the income tax return, subject to review.

Following a review, the authority amended the assessment. It did not recognise the remediation costs as immediately deductible maintenance expenses and did not treat the reimbursement from the shaft owner as income. In the Tax Office’s view, the costs constituted subsequent production costs relating to the land. The claimants’ objection was unsuccessful.

### Fiscal Court Found Reconstruction

The action before the Finanzgericht Münster was also unsuccessful. The court classified the expenses as subsequent production costs relating to the land. It regarded the land as having been completely exhausted before the remediation and found that reconstruction had occurred.

In their appeal on points of law, the claimants challenged this classification in particular. They argued that land is a non-depreciable asset and therefore cannot be subject to complete exhaustion. The work had merely restored the condition that existed when the property was acquired in 1990.

The claimants further argued that the expenses related entirely to the utility shaft owned by a third party. The Tax Office countered that the work had restored the usability of the land and had therefore resulted in subsequent production costs.

## BFH Attributes the Expenses to the Land

The BFH did not accept the claimants’ view that the costs should be attributed to the utility shaft owned by the company. The Fiscal Court had found that the expenses borne by the claimants were intended to restore the usability of their property.

This assessment of the facts was binding on the BFH pursuant to § 118 Abs. 2 FGO (German Fiscal Court Code). As a court hearing an appeal on points of law, it was not permitted to substitute its own assessment because the Fiscal Court’s assessment was a permissible one.

### Procedural Objections Were Unsuccessful

The procedural objections raised against the findings of fact were also unsuccessful. The Fiscal Court had based its assessment on the overall circumstances and had taken the following factors into account:

- It had included the expert reports obtained in its assessment.
- It had considered the claimants’ submissions.
- It had evaluated the agreement with the owner of the utility shaft.

According to the record of the hearing, the claimants had not applied for a further expert report during the oral hearing. In the BFH’s view, they had therefore waived the taking of corresponding evidence.

## Requirements for Subsequent Production Costs

In distinguishing between immediately deductible expenses and production costs, the BFH relied on [§ 255 Abs. 2](https://www.gesetze-im-internet.de/hgb/__255.html) sentence 1 HGB (German Commercial Code). The definition set out there also applies under tax law and to rental and leasing income.

Accordingly, production costs may arise from expenses incurred in producing an asset, expanding it or materially improving it beyond its original condition.

### Material Improvement of the Land

Expenses incurred after the acquisition of a property may also constitute subsequent production costs relating to the land. This requires the costs to have been incurred not as a result of constructing a building but through the use of the land itself, and for the land thereby to undergo a material improvement compared with its original condition.

A material improvement exists if the asset’s overall utility value increases significantly according to objective criteria. The measure must go beyond modernisation in line with current standards and create greater potential for use. This may be the case, for example, with land reclamation, cultivation or development measures.

If, by contrast, the work merely serves to maintain the property, it may qualify as immediately deductible income-related expenses or business expenses. The fact that usability is improved is therefore not decisive on its own. Rather, the determining factor is whether the condition achieved after the work materially exceeds the relevant initial condition.

## Original Condition as the Benchmark

For the purposes of § 255 Abs. 2 sentence 1 HGB, the original condition is generally the condition at the time the property was recognised as part of the taxpayer’s assets. In the case of acquired property, this will normally be the time of acquisition.

To determine whether there has been a material improvement, the utility value after completion of the repair work must be compared with the utility value at the relevant initial date.

### Female Claimant’s Interest

The female claimant’s co-ownership interest had continuously formed part of her private assets since the acquisition. According to the Fiscal Court’s findings, which were binding on the BFH, the remediation measures merely restored the condition that existed when the property was acquired in 1990.

There was therefore no material improvement beyond that condition with respect to her interest. The BFH consequently rejected the classification of the corresponding expenses as production costs.

The finding of reconstruction likewise did not withstand review. According to the BFH, reconstruction requires prior initial production within the meaning of § 255 Abs. 2 sentence 1, alternative 1 HGB. Such initial production is not possible in the case of land.

## Special Considerations for Former Business Assets

The Fiscal Court’s finding of production costs was also legally erroneous with respect to the male claimant’s co-ownership interest. However, the BFH was unable to determine conclusively whether the corresponding expenses constituted subsequent production costs due to a material improvement.

### Possible Write-Down to Going-Concern Value Changes the Comparison

If the original acquisition costs of an asset were adjusted after the asset was recognised, the relevant condition used for comparison may change. In the case of land, this applies in particular if a write-down to going-concern value was made while the land formed part of business assets and that write-down concerned its substance or usability.

In such a case, the condition at the time of the original acquisition is not necessarily decisive. Instead, the condition underlying the write-down to going-concern value must be compared with the condition after completion of the remediation work.

The subsequent withdrawal from the business assets does not alter this factual comparison. In this respect, acquisition and withdrawal cannot be treated as equivalent.

### Fiscal Court’s Incomplete Findings

The Fiscal Court had not examined whether the male claimant had made a write-down to going-concern value pursuant to § 6 Abs. 1 Nr. 1 sentence 2 EStG (German Income Tax Act) while his interest in the property formed part of his business assets. Nor had it made any findings as to when any such write-down might have occurred.

However, the tax classification of the expenses attributable to the male claimant depends precisely on this issue:

- If a relevant write-down to going-concern value was made, the condition at that time must be compared with the condition after the remediation in 2019. If this comparison reveals a material improvement, subsequent production costs relating to the land may have arisen.
- If the acquisition costs remained unchanged until the withdrawal on 31 December 2018, the condition at the time of the acquisition in 1990 remains the benchmark. Since, according to the binding findings, the remediation merely restored that condition, the expenses attributable to the male claimant’s interest would be deductible as income-related expenses.

## Fiscal Court to Issue a New Decision

The BFH set aside the judgment of the Finanzgericht Münster. A final decision was not possible due to the incomplete findings of fact.

In the further proceedings, it may first be necessary to determine whether the claimants’ jointly generated income must be assessed separately and uniformly. If such an assessment is not required, particularly for reasons of procedural economy, the Fiscal Court must examine whether and when a write-down to going-concern value affecting the property’s substance or usability was made.

The final tax treatment of the share of the costs attributable to the male claimant therefore remains unresolved. At the same time, the judgment makes clear that production costs relating to land can arise only if the measure results in a material improvement compared with the relevant initial condition in each case.

## Tax Classification Requires Separate Consideration

In the case of remediation measures involving properties that are let or intended to be let, the distinction between immediately deductible income-related expenses and subsequent production costs may depend on the allocation of the property to private or business assets and on earlier changes in value. In particular, the case demonstrates that even where property is jointly owned, different initial conditions may be relevant to the individual co-ownership interests.

MTR Legal Rechtsanwälte advises companies, investors and high-net-worth private individuals on the tax classification of complex property matters. Further information is available under [Tax Law Advice](https://www.mtrlegal.com/rechtsberatung/steuerrecht/).