Real Estate Tax News: Greater legal certainty regarding the allocation of the purchase price for property

Under the planned § 6f of the Income Tax Act (EStG), the law is to regulate for the first time how the purchase price of a developed plot of land is to be apportioned between the land and the building. The new provision is largely based on the existing case law of the Federal Fiscal Court and now enshrines this in an explicit statutory basis. For investors, companies and advisers, this creates greater transparency and planning certainty in property transactions. At the same time, the importance of careful documentation is likely to increase further, as the tax authorities will scrutinise the appropriateness of purchase price allocations even more closely in future. As a result, tax structuring is also becoming increasingly important for current and future investment decisions.

The allocation of the purchase price is far more than a technical detail, as it directly influences the amount of tax-deductibleand thus the current tax burden. A higher proportion of the building generally leads to greater depreciation potential and can significantly improve the profitability of a property investment. Particularly in the case of large-scale properties, different valuation approaches can lead to considerable financial discrepancies. The practical examples presented in this article show that the tax implications over the holding period can be of a magnitude that is of considerable significance for the investment decision. Consequently, it is of great importance to allocate the purchase price appropriately and reliably at the time of acquisition.

Provided there is no validor if it is not recognised for tax purposes, the allocation is to be based on market values in future. This is based on recognised property valuation methods, in which the value of the land and the value of the building must be determined separately. The residual value method, which has been applied in some cases to date, is to be excluded. This will align the valuation more closely with the actual economic circumstances of the property. At the same time, the requirements for expert reports and valuation processes are increasing; these are likely to play an even more important role in tax recognition in future. 

Even though, as things stand, the new regulations are only intended to apply to future acquisitions, they may provide a reason to critically review existing purchase price allocations. Particularly in the case of high-value properties and tax assessment periods that are still open, it is worth analysing the valuation methods used to date. Timely and professionally sound documentation can reduce future tax risks and unlock additional potential. This applies to both private and business property investments. Those who incorporate the purchase price allocation into their investment planning at an early stage can secure significant long-term tax benefits.

The proposed Section 6f of the German Income Tax Act (EStG) provides a statutory basis for existing case law and administrative practice for the first time, thereby ensuring greater clarity regarding the tax treatment of property acquisitions. At the same time, the allocation of the purchase price will come under even greater scrutiny from the tax authorities in future and will therefore gain in practical significance. Investors are therefore advised to analyse the allocation between land and buildings at an early stage, document it carefully and, where necessary, have it confirmed by a qualified valuation report. This is because a proper allocation of the purchase price is not merely a tax formality, but a key factor in the long-term profitability of a property investment.