Tax tip: Energy-related refurbishment costs

According to conservative estimates, around ten million properties will need to undergo energy-efficient refurbishment over the next ten years due to EU legislation and the Building Energy Act recently passed by the German parliament. In concrete terms, this means measures on the building envelope, such as insulating the property or the building technology, or replacing heating systems that run on fossil fuels with more energy-efficient heating systems. This always incurs costs that can have different tax implications.

In the case of a rented flat, the costs of replacing the heating system are immediately deductible income-related expenses that reduce income at the time of payment. With an average tax rate of, for example, 40 per cent and costs for a heat pump of, for example, 30,000 euros, the tax saving then amounts to 12,000 euros. The same applies to the cost of insulating the building.

However, caution is advised if you use the energy-efficient refurbishment to replace other measures such as the windows, electrical installation or sanitary facilities at the same time. This can lead to a significant improvement in the building, meaning that the costs are to be assessed as production costs for tax purposes. This means that in the case of an existing property, these maintenance costs can only be recognised as income-related expenses over a regular period of 50 years. In relation to the above example, this means that the taxpayer does not achieve a one-off tax saving of EUR 12,000, but rather a tax saving of just EUR 240 per year over the next 50 years. It is also important to note that the expenses are not incurred close in time to the purchase of the property. If the (energy-related) refurbishment costs exceed 15 per cent of the acquisition costs for the building within three years of purchase, these can only be taken into account as depreciation over the useful life of the building, which is usually 50 years, and not as immediately deductible income-related expenses.