Acquisition-related Expenses – Legal Definition and Classification
The term acquisition-related expenses plays a significant role in German tax law, particularly in the field of income tax law. It refers to expenses incurred in temporal connection with the acquisition or construction of an asset, especially a property, and are allocated to expenses similar to acquisition or production costs. The tax classification of such expenses is at the center of numerous discussions in tax law and is governed by Section 6 (1) No. 1a of the German Income Tax Act (EStG).
Statutory Basis for Acquisition-related Expenses
Section 6 (1) No. 1a EStG
With the introduction of Section 6 (1) No. 1a EStG, the treatment of acquisition-related expenses was regulated by law for the first time. The provision stipulates that Expenses for repair and modernization measures, which are carried out within three years after the acquisition of a building, constitute acquisition-related expenses if, excluding VAT, they exceed 15 percent of the acquisition costs of the building.
Essential Characteristics
- Temporal Reference: Within three years after acquisition.
- Cost Threshold: Exceeding the 15 percent threshold based on the acquisition costs of the building, excluding VAT.
- Type of Expenses: Repair and modernization measures.
Distinction between Maintenance Expenses and Acquisition-related Expenses
A key challenge lies in the distinction between acquisition-related expenses and maintenance expenses. While maintenance expenses can be deducted immediately for tax purposes as income-related expenses or business expenses, acquisition-related expenses are added to the acquisition costs of the asset, e.g. a property, and are only considered in the context of depreciation (AfA) to reduce profits.The key points are:
- Maintenance expenses serve to maintain the pre-existing condition,
- acquisition-related expenses lead to an upgrade or fundamental modernization beyond the original condition.
Elements of Acquisition-related Expenses
Requirements
- Eligible Asset: Building (not: land, not moveable property).
- Eligible Parties: Direct purchasers of an existing building.
- Measures: Repair and modernization measures, but not production costs.
- Relevant Period: Within three years after acquisition.
- Cost Threshold: Exceeding the 15-percent threshold (excluding VAT).
Non-included Expenses
The following measures are excluded from acquisition-related expenses excluded:
- Expenses for extensions,
- Expenses for maintenance measures that are regularly incurred annually (e.g. maintenance work),
- Costs for cosmetic repairs, provided these are not part of a comprehensive refurbishment.
Examples of Acquisition-related Expenses
- Replacement of windows,
- Renewal of the heating system,
- comprehensive modernization of the electrical installation,
- extensive bathroom renovation.
Legal Consequences of Acquisition-related Expenses
Activation Obligation
Acquisition-related expenses must be added to the acquisition cost of the building and accordingly increase the assessment base for tax depreciation. This extends the period of tax consideration: instead of immediate deduction as income-related expenses or business expenses, consideration is given within the framework of depreciation over the useful life.
Impact on Deduction of Income-related Expenses
In contrast to direct maintenance expenses, which reduce the tax burden in the year of payment, acquisition-related expenses due to the activation obligation are only tax-deductible in proportion over the respective depreciation period.
Practical Importance and Application
Correct classification of expenses as acquisition-related or not acquisition-related is of considerable tax relevance for property owners. Misjudgments can lead to tax disadvantages, required corrections, or even retroactive taxation. In particular, after extensive refurbishment following the acquisition of a property, careful examination is required.
Distinction from Production Costs and Extensions
Production Costs
Classic production costs must be distinguished from acquisition-related expenses Production Costs within the meaning of Section 255 HGB and Section 6 (1) No. 1a Sentence 2 EStG. Production costs arise, for example, during the extension of a building or the initial installation of previously absent essential features.
Extensions
Extensions, such as the addition of a conservatory or raising the building, are not considered acquisition-related expenses. These costs must always be treated as production costs and increase the depreciation that can be claimed for these new components.
Administrative Guidelines and Case Law
The tax authorities have set out Income Tax Guidelines (EStR) and circulars from the Federal Ministry of Finance (BMF) numerous principles for the interpretation of acquisition-related expenses. The tax courts, in particular the Federal Fiscal Court (BFH), have also repeatedly commented on interpretation and distinction.
Key Aspects in Case Law
- The 15% threshold applies only to building costs, not land costs.
- The addition of all costs incurred in the three years (“connection of measures”).
- No reduction for insurance compensation.
Borderline Cases and Special Features
Partial Letting and Own Use
For mixed-use buildings, checking the 15-percent threshold applies only to the rented part of the building. The pro rata acquisition costs are allocated accordingly.
Time of Acquisition
Decisive is the legal transfer of economic ownership, usually with transfer of benefits and burdens in the notarized purchase contract.
Conclusion
Der acquisition-related expenses is a key term in German tax law distinguishing immediately deductible maintenance expenses from acquisition costs for buildings that must be capitalized. Correct application requires a precise analysis of the measures carried out, the amount of costs, and the temporal connection with the acquisition of a property. When handling expenses after acquiring a building for tax purposes, compliance with statutory and administrative requirements is essential to avoid financial disadvantages.
Frequently Asked Questions
How long is the period in which expenses must be treated as acquisition-related expenses?
The relevant period for acquisition-related expenses is clearly defined by law and is generally three years (36 months) after the acquisition or construction of a building. This means: All repair and modernization measures that are carried out and capitalized within this period must be carefully checked. If the requirements of further tax provisions are fulfilled, these expenses must be obligatorily classified as acquisition-related production costs, which has a direct impact on tax depreciation or write-off for wear and tear (AfA). The start of the period is of particular importance: what counts is the time of acquisition or completion according to the purchase contract or acceptance protocol. If a property is comprehensively renovated within three years of purchase, the expenses incurred are generally allocated to acquisition-related expenses, unless they count as immediately deductible maintenance expenses.
Which expenses are specifically considered acquisition-related expenses?
According to the provisions of the Income Tax Act (§ 6 (1) No. 1a EStG), acquisition-related expenses generally include all expenditures for repair and modernization measures that arise within the three-year period mentioned above after acquisition and are not deemed immediately deductible maintenance expenses, acquisition-related costs, or operating expenses. These in particular include works aimed at significant improvement or maintenance of the building, such as replacement of window systems, heating systems, electrical installations, roof coverings, or the replacement of sanitary installations. Exceptions are only made for expenses incurred for extensions—which in any case are to be treated as production costs—and for measures that serve only routine maintenance and do not exceed the legally established value limit.
Is there a monetary threshold for acquisition-related expenses?
Yes, there is a statutory value threshold from which modernization and repair expenses are classified as acquisition-related. According to Section 6 (1) No. 1a Sentence 1 EStG, the threshold is 15 percent of the acquisition cost of the building, in each case net, i.e., without VAT, unless input tax deduction is not excluded. If the repair and modernization expenses incurred within the three-year period add up to exceed this percentage, they must be capitalized as production costs and written off over the useful life of the building. If they are below this, they can generally be claimed immediately as maintenance expenses in the year they are incurred.
Which expenses are explicitly not treated as acquisition-related expenses?
Expenses that are not regarded as acquisition-related expenses include costs for maintenance measures that serve only for ongoing upkeep and do not individually result in a significant improvement of the building, such as wallpapering or painting work if the value is insignificant, as well as purely cosmetic repairs. In addition, there is an explicit exception for expenses arising from the extension of the building (such as converting an attic). Such costs are already classified as production costs under other provisions and thus are not subject to the rule for acquisition-related expenses. Also, costs for verifiably removed hidden defects or for remedial work for damages that were not recognizable at the time of acquisition may, in certain cases, be excluded from acquisition-related expenses, provided it can be demonstrated these already existed at purchase.
How should acquisition costs be handled when calculating the 15% threshold?
To determine the 15% threshold, only the net acquisition costs of the building are relevant. These do not include the purchase price of the land, but only the share attributable to the building, which is regularly determined by the notarized purchase contract or an allocation made by the tax office as part of the tax valuation. Directly attributable incidental costs, such as broker fees, real estate transfer tax, and notary fees, are also to be taken into account if they are also allocated proportionally to the building. Thus, before checking whether the threshold is exceeded, a clean and comprehensible calculation of the pure building acquisition costs is always required.
What are the tax consequences if the 15% threshold for acquisition-related expenses is exceeded?
If the statutory threshold is exceeded, the corresponding expenses must be capitalized as production costs of the building. This means no immediate deduction as business or income-related expenses is possible. Instead, these expenses increase the assessment basis for future building depreciation (AfA). The tax effect is that the expense is distributed over the normal useful life of the building—usually at least 40 or 50 years for residential buildings—and only proportionally recognized as a tax-deductible expense. Thus, exceeding the 15% threshold necessarily extends the depreciation period, limiting the immediate tax relief.
What documentation obligations do taxpayers have in connection with acquisition-related expenses?
Taxpayers are obliged to document repair and modernization measures in detail within the three-year period and to properly retain the respective receipts. In addition, they must disclose to the tax authorities fully and truthfully all relevant information necessary for checking the 15% threshold. This especially includes detailed cost breakdowns, precise timing of the measures, and clear assignment to individual trades. The tax authorities are entitled to demand the breakdown and, especially in the case of deduction as business or income-related expenses, to carry out detailed examinations. Inadequate documentation can, in legal disputes, lead to estimates by the tax office or denial of immediate deduction.
