Generally, buildings used to generate income are depreciated at the standardized rates pursuant to Art. 7 (4) sentence 1 EStG (German Income Tax Act). Depending on the building’s type and year of construction (operational use or use in order to generate income from rent and lease), the law assumes useful lives of 50, 40 or 33 years.
According to sentence 2 of the provision, however, a shorter actual useful life can be proven and thus used as basis for depreciation.
How does a shorter useful life have to be proven?
The question of how a shorter useful life needs to be proven in the individual case remained largely unclear. With its decision of July 21, 2021 (IX R 25/19), the BFH ruled that any verification method which seems to be appropriate in order to provide the required proof is admissible. According to such ruling, the evidence needs to provide information on the relevant determinants, for example, technical wear and tear, economic devaluation, or possible legal restrictions on use. A useful life estimated on the basis of these parameters is consequently only inadmissible if such estimate is clearly outside the reasonable scope.
What role does the German Property Valuation Ordinance play?
In the specific case, the BFH had considered a publicly appointed and sworn expert’s opinion to be an admissible basis. Such expert’s appraisal was based upon model assumptions for deriving the remaining economic useful life pursuant to the German Property Valuation Ordinance (“ImmoWertVO”), which are used for the preparation of market value reports. The BFH considered the fact that these model-based calculations are not primarily used for the determination of useful lives to be irrelevant. In particular, it is not necessary for the BFH to use a building fabric appraisal.
In several subsequent rulings, the financial courts applied the case law favorable to the taxpayer (Cologne fiscal court of March 23, 2022, 6 K 923/20; Münster fiscal court of January 27, 2022, I K 1741/18 E; Münster fiscal court of February 14, 2023, 1 K 3840/19 F).
In its BMF letter, the fiscal authorities clearly comment on the ImmoWertVO’s model-based approach
The legislation initially planned to respond by deleting Art. 7 (4) sentence 2 EStG within the scope of the 2022 Annual Tax Act. Since such deletion has not been implemented, however, the tax authorities for the first time commented on this in a BMF letter. Such letter’s tenor is that, in the tax authorities’ opinion, it is not sufficient to prove a shorter remaining useful life with a property value report which is not primarily aimed at proving a shorter remaining useful life. In particular, the fiscal authorities do not recognize market value reports based upon the ImmoWertVO’s model-based approach as being appropriate for these purposes.
In case of a shorter useful life, the technical assessment pursuant to DIN EN ISO/IEC 17024 is decisive
The fiscal authorities emphasize the technical useful life and demand an assessment of the respective supporting structure’s useful life, which includes the roof, walls, floor slabs and the base. A shorter useful life would require for the building’s usability to be impaired in its entirety due to the load-bearing parts’ technical wear and tear. An economic devaluation could only be applied in exceptional cases if the building is objectively economically used up, i.e., the possibility of an economically reasonable alternative use or utilization has finally ceased to exist.
Insofar, the tax authorities require the expert opinion of a publicly appointed and sworn expert or a body accredited for the appraisal of real properties according to DIN EN ISO/IEC 17024. Such opinion must present the building’s condition according to the elements crucial for the useful life and must additionally explain why an economically reasonable subsequent use was no longer possible at the end of the calculated remaining useful life. The opinion must expressly serve the purpose of determining the useful life and must include technical wear and tear, economic devaluation or possible legal restrictions on use.
Overall, the fiscal authorities request for the shorter useful life to be determined on a forecast basis, also taking into account uncertain future events. The highest probability derived therefrom formed the basis for estimating the useful life.
The fiscal authorities demand stricter standards for the proof of a shorter useful life
With its BMF letter of February 22, 2023, the fiscal authorities ultimately eliminate the Federal Court of Finance’s case law which is favorable for taxpayers and impose clearly stricter standards on the proof of a shorter useful life. In particular, it is to be feared that the inclusion of “uncertain future events” will require a probability forecast with regard to these events’ occurrence and, as a result thereof, claiming shorter useful lives will be rarely successful. However, since the law has not been amended, the favorable case law continues to apply. In case of doubt, one must therefore always consider whether the tax advantage from claiming a shorter useful life outweighs the need to conduct a lengthy legal action. In any case, when referring to case law within the scope of a tax return, the tax return must include a corresponding note as this deviates from the tax authorities’ opinion.