Income from Rentals and Leasing: How to Distinguish Maintenance Expenses from Construction Costs?

To determine income from renting and leasing, it is essential to distinguish between maintenance expenses and construction costs. While maintenance expenses are immediately deductible as income-related expenses, construction costs (as well as acquisition costs) can only be accounted for through the depreciation deduction. The lines between these two types of costs are often blurred and frequently lead to disputes between taxpayers and the tax authorities.

Maintenance Expenses

Expenses intended to renew existing parts of a building, fixtures, or equipment are classified as maintenance expenses and are therefore considered immediately deductible income-related expenses.

Construction costs

Expenses for the construction of a new building (e.g., in the case of total wear and tear), for a building extension, or for a substantial improvement beyond the original condition cannot be claimed as income-related expenses. By definition, these fall into the “construction costs” category. Similarly, costs cannot be claimed as income-related expenses if, for example, they are for modernization measures carried out within three years of acquisition and exceed 15 percent of the building’s acquisition cost.

Expenses for Energy-Efficiency Renovation Measures

In times of rising energy costs and growing awareness of environmental protection, this categorization also applies to the assessment of energy-efficiency retrofit measures aimed at reducing a building’s energy consumption. These expenses for energy-efficiency retrofit measures are immediately deductible as maintenance expenses.