Allocation of the purchase price

Purchase Price Allocation - Purchase price allocation refers to the division of a property’s total purchase price into a building portion and a land portion; this distinction is particularly crucial for tax depreciation (AfA).

Why is the purchase price allocation so important for tax purposes?

Anyone who purchases a property as an investment or uses it for business purposes can claim the building’s depreciation as a tax deduction through the so-called depreciation allowance (AfA). The key point here is that only the building portion is eligible for depreciation, as land is not subject to depreciation and therefore cannot be depreciated. The higher the building portion of the total purchase price, the higher the annual depreciation-and the greater the tax relief.

The allocation can be agreed upon in the purchase contract, provided it reflects the actual value ratios. If there is no contractual provision or if the tax office questions the agreed allocation, the tax authority will make its own estimate. The guidance from the Federal Ministry of Finance (BMF) is frequently used for this purpose-an Excel tool that calculates the building and land value shares based on standardized construction costs and the standard land value.

The standard land value plays a central role in this calculation. It is determined by local appraisal committees and indicates the average market value of the land per square meter. Multiplied by the land area, this yields the land value share. The difference from the total purchase price is then attributed to the building. In locations with high standard land values-such as in city centers-the land portion can significantly exceed the building portion, which considerably reduces the depreciation base.

The Federal Fiscal Court (BFH) has clarified in several rulings that the BMF guidance document represents merely one estimation method among several and must not be the sole determining factor. If the allocation agreed upon in the purchase agreement deviates only slightly from the objective value ratios, it must generally be recognized. Only in the case of significant deviations may the tax office perform its own valuation. We recommend that investors carefully formulate the allocation in the purchase agreement and, if necessary, support it with an expert opinion.

Methods for Market-Based Allocation

In addition to the BMF guidance, there are other recognized methods for determining a market-based purchase price allocation. The cost approach determines the building value based on construction costs minus depreciation due to age. The income approach is particularly suitable for investment properties and derives the building value from the achievable rental income. In practice, a combination of several methods is often advisable. A qualified appraisal by a certified expert offers the greatest legal certainty vis-à-vis the tax authorities and can be economically worthwhile given the tax implications over the entire depreciation period.

Practical Tip for Property Owners in Nuremberg and Franconia

In the Nuremberg metropolitan region, standard land values vary considerably. While standard land values of several hundred euros per square meter are not uncommon in Nuremberg’s Old Town, in Erlenstegen, or in the Schmausenbuck area, values in outlying areas or the rural surroundings are significantly lower. This has a direct impact on the breakdown of the purchase price: For a condominium in the city center, the land portion can account for more than half of the purchase price, while for a comparable property in Lauf an der Pegnitz or Hersbruck, the building portion dominates.

We advise investors in the region to check the standard land values with the Appraisal Committee of the City of Nuremberg or the respective district before purchasing and to calculate the expected breakdown of the purchase price. This allows for an early assessment of how high the annual depreciation will be and whether the investment will pay off tax-wise as planned.

Frequently Asked Questions

Does the purchase price allocation have to be included in the notarial deed?

A contractual allocation is not required by law, but it is recommended. If it is missing from the purchase agreement, the tax office will make its own estimate-often using the BMF guidance, which tends to result in a higher land value ratio. A breakdown agreed upon in the purchase contract and supported by objective evidence therefore offers greater planning certainty and is generally recognized by the tax office, provided it transparently reflects the actual value ratios.

What happens if the tax office does not accept the allocation?

If the tax office does not recognize the allocation agreed upon in the purchase agreement or stated in the tax return, it will apply its own estimate. An objection can be filed against this. To support your position, it is recommended to obtain an expert opinion from a publicly appointed and sworn expert. The Federal Fiscal Court (BFH) has confirmed that the Federal Ministry of Finance (BMF) guidance document must not be the sole criterion and that individual circumstances must be taken into account.

How does the purchase price allocation affect depreciation?

Annual depreciation is calculated by multiplying the building portion of the purchase price by the applicable depreciation rate. For residential buildings completed after December 31, 2022, the rate is three percent over a period of approximately 33 years. For older buildings, a rate of two percent over 50 years generally applies. A building portion that is, for example, 50,000 euros higher results in an additional tax savings of 1,000 euros per year at a two percent depreciation rate-over the entire useful life, this adds up to a significant amount.

What is the significance of the purchase price allocation when acquiring older multi-family homes in Nuremberg?

When purchasing older multi-family homes in downtown Nuremberg locations-such as Wilhelminian-style buildings in St. Johannis, Wöhrd, or Gostenhof-the purchase price allocation is particularly delicate because the standard land value in these locations often accounts for a very high proportion of the total price. In central Nuremberg locations with standard land values ranging from 800 to over 1,200 euros per square meter of land area, the land value portion for a narrow Wilhelminian-style building on a small lot can easily reach 40 to 60% of the purchase price. This significantly reduces the depreciation base. At the same time, older buildings in need of renovation offer the opportunity to claim larger maintenance expenses for tax purposes in the first few years-provided there are no acquisition-related construction costs within the meaning of Section 6(1)(1a) of the German Income Tax Act (EStG). We recommend that buyers of older properties in Nuremberg coordinate their tax strategy with a tax advisor before the purchase and document the purchase price allocation in line with market conditions using an expert appraisal.

Back to the Real Estate Glossary.