Complete overhaul

In the construction industry and real estate management, major renovation refers to a comprehensive renovation or restoration of building components or technical systems that have reached the end of their useful life. It goes beyond mere repairs or cosmetic repairs and involves the complete replacement of building components or systems-such as the roof, heating system, electrical wiring, or windows. From a tax law perspective, the distinction between major renovation (construction costs) and maintenance expenses (immediately deductible) is of significant importance.

Distinction: Maintenance Expenses vs. Construction Costs

The tax classification of a measure as a maintenance expense or as a construction cost (which must be capitalized and depreciated over the useful life) has significant implications for the tax burden. A measure is considered a maintenance expense if it merely restores the building’s condition or maintains it at the same level. If the measure substantially improves the building or renews its substance (major renovation), construction costs arise. The line between the two is blurred and is regularly the subject of tax audits.

Construction Costs Incurred Shortly After Acquisition (Section 6(1)(1a) EStG)

A particular pitfall lies in so-called acquisition-related construction costs: Investments in a building that exceed 15% of the building’s acquisition costs (excluding the land portion) within three years of acquisition are mandatorily classified as construction costs-regardless of whether they would actually be immediately deductible under maintenance standards. This comes as a surprise to many buyers of properties in need of renovation who undertake extensive renovations early on.

Practical Tip for Property Owners in Nuremberg and Franconia

Anyone purchasing a property in need of renovation in Nuremberg or the metropolitan region should discuss the planned renovation measures with a tax advisor before making the purchase. In particular, the 15% limit on acquisition-related construction costs can mean that extensive renovations in the first three years are not immediately tax-deductible, but only through depreciation. A smart distribution of the measures across several tax years can secure significant tax benefits here.

Frequently Asked Questions

When is a roof renovation considered maintenance expenses and when is it considered construction costs?

If the roof is replaced in the same manner as the original (same roofing material, same thermal insulation thickness), there is a strong case for it being classified as maintenance expenses. If the roof is simultaneously expanded, insulated, or equipped with a photovoltaic system, construction costs may apply. The decisive factor is the overall assessment of the project.

Can I circumvent the 15% limit on acquisition-related construction costs?

Careful planning can help avoid this limit: measures carried out after the three-year period has expired are no longer subject to the rule. The correct allocation of the purchase price between the building and the land also affects the absolute value of the 15% limit.

How are major renovation costs treated for tax purposes if they are classified as construction costs?

They are added to the building’s value and depreciated over the building’s remaining useful life (typically 2% annually for new buildings constructed after 1924). However, for energy-efficiency renovation measures, there are special cases involving increased depreciation or direct tax credits (Section 35c of the German Income Tax Act).

Major Renovations in a Condominium Association

In a condominium association (WEG), the major renovation of common property poses a particular challenge. Common property includes the roof, facade, stairwell, heating system, and other shared structural components. When these reach the end of their useful life, the homeowners’ association must decide on and finance a major renovation.

The costs are generally distributed among the owners according to their co-ownership shares. A sufficient maintenance reserve is crucial for covering major renovations without requiring special assessments. Following the 2020 HOA reform, homeowners’ associations are explicitly required to establish an adequate maintenance reserve. Depending on the scope of the project, the resolution for a major renovation requires either a simple majority or-in the case of structural changes-a qualified majority.

For tax purposes, owners who rent out their apartments can claim their share of the costs of a major renovation of the common property as income-related expenses-either as maintenance expenses or through depreciation, depending on how the measure is classified. The maintenance fee statement should transparently itemize these costs.

Major Renovation and Energy Efficiency

Major renovation measures often provide an opportunity to improve a building’s energy efficiency at the same time. Those re-roofing can insulate it more effectively; those replacing the heating system can switch to renewable energy sources. By combining major renovation with energy efficiency improvements, government subsidy programs can be utilized: The KfW’s Federal Funding for Efficient Buildings (BEG) supports both individual renovation measures (BEG EM) and complete renovations to create an “Efficiency House.” Before beginning major renovation work, owners should check which funding criteria apply, as it is often not possible to apply for funding retroactively.

For buildings in Nuremberg and the metropolitan region, the City of Nuremberg also offers supplementary consulting services as part of its municipal climate protection program and, during certain funding periods, additional grants for energy-efficient renovations. Combining comprehensive renovation with a subsidy program requires careful planning and often the involvement of an energy consultant.

Major Renovations and Tenancy Law

Major renovations hold particular significance in tenancy agreements: Landlords are obligated to maintain the rental property in a condition consistent with the contract. If parts of the building reach the end of their technical service life and defects arise as a result, the landlord is obligated to repair them-if necessary, through major renovation. The costs of major renovations cannot simply be passed on to tenants: Only modernization measures that sustainably increase the utility value of the rental property or save energy justify a rent increase for modernization under Section 559 of the German Civil Code (BGB) (up to 8% of the costs incurred annually, capped at the local comparative rent). Pure maintenance measures, even if they are expensive, do not justify a rent increase. For landlords in Nuremberg, it is therefore worthwhile to clearly distinguish which parts of a major renovation qualify as modernization and which as pure maintenance.

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