Production costs incurred at the time of acquisition

Pre-acquisition construction costs - Pre-acquisition construction costs are expenses for maintenance and modernization measures incurred within three years of purchasing a property and totaling more than 15 percent of the building’s acquisition cost (excluding the land portion). They are not recognized for tax purposes as immediately deductible business expenses, but are added to the acquisition cost of the building and depreciated over its useful life (Section 6(1)(1a) of the German Income Tax Act (EStG)).

The 15-Percent Rule in Detail

The assessment is carried out in three steps: First, the pure building acquisition costs are determined (purchase price minus the land portion and ancillary costs of the land). Second, all maintenance and modernization costs (net, excluding sales tax) for the first three years following the purchase are added together. If the total exceeds 15 percent of the building acquisition costs, all expenses-not just the excess amount-are classified as acquisition-related production costs. Third, this amount must then be capitalized and depreciated via depreciation.

Calculation example - Nuremberg-Südstadt, Wilhelminian-style building:

Item	Amount
Total purchase price	€450,000
Land portion (35%)	€157,500
Building acquisition costs	€292,500
15% limit (threshold)	€43,875
Renovation costs Year 1 (heating, bathroom)	€28,000
Renovation costs Year 2 (electrical, flooring)	€20,000
Total renovation costs (net)	€48,000
Result: Limit exceeded	All €48,000 must be included

The entire €48,000 is added to the building’s acquisition cost. The building’s new depreciation base is €340,500 (€292,500 + €48,000), and the annual depreciation at 2% amounts to €6,810. If the owner had invested only €43,000, the costs would have been immediately and fully deductible as business expenses-a significant difference in the year of the investment.

Exceptions to the Rule

The following are not included in the acquisition-related construction costs:

• Expenses for expansions: Anyone who adds an extension or creates additional usable space capitalizes this as construction costs anyway-these do not count toward the 15% calculation.
• Annual maintenance work that typically occurs: Cosmetic repairs such as painting and wallpapering, which occur on a regular basis every two to five years, are excluded from the calculation. The Federal Fiscal Court (BFH) has confirmed this in several rulings (BFH IX R 22/13, BFH IX R 41/17). However, the tax authorities interpret this exception narrowly; providing reliable documentation (lease agreement, renovation report) is recommended.
• Expenses for building sections newly constructed after the purchase: These must be capitalized as separate construction costs, regardless of the three-year period.

Strategic Planning - Renovation Before and After the Three-Year Period

The three-year period begins on the date of the legal transfer of the property (registration of the conveyance or handover, depending on the contract terms). Carefully staggering renovation measures over time can significantly influence the tax implications:

• Postpone major measures to year 4: Investments made after the three-year period expires are immediately deductible as maintenance expenses.
• Adhere to the limit strategically: Those who consistently keep investments below 15% of the building’s acquisition costs during the first three years benefit from full immediate deductibility.
• Check the allocation: Depending on the purchase agreement, the land portion may be reported differently-a higher building portion increases the 15% limit in absolute euro terms.

Impact on capital gains tax

The construction costs incurred shortly after acquisition increase the property’s tax-deductible acquisition cost. This also affects the calculation of a potential capital gain: If the property is sold within the ten-year speculation period, the gain is calculated based on the acquisition cost increased by the pre-acquisition construction costs-meaning the capitalized expenses reduce the taxable capital gain. This can be an advantage if the sale is expected to occur within the speculation period.

Practical Tip for Investors in Nuremberg

For older buildings in Nuremberg-such as in the Südstadt, Gostenhof, or St. Leonhard-renovation costs after purchase can quickly exceed the 15% threshold. We recommend staggering the renovation work: carry out urgent work within the first three years while keeping an eye on the limit, and postpone larger projects to the fourth year after purchase if necessary. Before purchasing, obtain a realistic cost estimate from a professional contractor-many older buildings in Nuremberg require investments of 40,000 to 80,000 euros in heating, electrical, and plumbing systems during the first few years, which will almost inevitably push the limit when the purchase price of the building is 200,000-250,000 euros. Have your tax advisor assist with your annual planning.

Frequently Asked Questions

Does the 15% rule also apply to owner-occupied properties?

No, the rule applies exclusively to rental properties for which business expenses are claimed. For owner-occupied residential property, renovation costs are generally not tax-deductible-neither as an immediate deduction nor through depreciation. The 15% rule is therefore only relevant for investors who generate income from renting and leasing (§ 21 EStG). If a property initially used for owner-occupancy is later rented out, the three-year period begins anew from the date of rental.

What happens if I stay just under 15 percent?

Then all expenses must be treated as immediately deductible maintenance costs-with full tax effect in the year of payment. The threshold is strict: Even one euro above the 15 percent threshold results in the total costs of the first three years being classified as acquisition-related production costs-including expenses from years 1 and 2 that were individually below the threshold. Anyone who exceeds the threshold for the first time in the second or third year must retroactively reclassify all prior-year costs. Ongoing documentation and timely monitoring with your tax advisor are therefore essential.

Do personal contributions count toward the 15 percent?

Personal contributions (colloquially known as “labor contributions”) are not recognized as expenses for tax purposes, since no payment is made to third parties. Only amounts actually paid to tradespeople or suppliers are included in the 15 percent calculation. Material costs that the owner purchases and installs themselves, however, do count, even if they perform the labor themselves. Therefore, anyone who only purchases materials and installs them themselves must include these material costs in the three-year calculation-even if no tradespeople’s invoice is issued.

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