Tax tip: Allocation of acquisition costs to land and buildings

This was the subject of a ruling by the Münster Fiscal Court on 22 September 2022 (8 K 2748/20 E). The taxpayer had purchased an apartment building for 2.4 million euros. In the purchase agreement, the contracting parties had agreed that €400,000 of the purchase price would be allocated to the land and the rest to the building. With a useful life of 50 years, this resulted in an annual depreciation of 2 per cent of the acquisition costs of the building, i.e. 40,000 euros. However, the tax office only wanted to accept an annual amortisation of 32,000 euros.

According to the established case law of the Federal Fiscal Court, the purchase price allocation made in a purchase agreement between the building on the one hand and the land belonging to it on the other must also be used as the basis for taxation. However, if there are indications that the allocation was made arbitrarily in order to obtain a higher depreciation, the purchase agreement is no longer binding. The tax court specifies this examination to the effect that the agreed value for the land must not have any significant discrepancy to the standard land values.

In the judgement case, this deviation was more than 60 percent, as the standard land value was around 1.1 million euros and the purchase price value for the land was only 400,000 euros. As the taxpayer was unable to prove the increased building value from his point of view by other evidence such as special features, the tax court applied the lower depreciation based on an expert opinion. The tax authorities have published a guide on the Internet on how to allocate acquisition costs. However, this does not take into account any particular property-specific building features, meaning that in individual cases it may be worth obtaining a market value appraisal.