Judgment of the Cologne Fiscal Court dated March 23, 2022, Ref. 6 K 923/20

• Depreciation in accordance with Section 7 (4) sentence 2 EStG can be based on a shorter actual useful life if this is plausibly proven and estimated; an ERAB building fabric appraisal is not mandatory for this.
• A value of the remaining economic useful life determined by an expert in accordance with ImmoWertV/Annex 4 (taking into account modernizations) can be recognized as the actual useful life if the method is comprehensible and sets out the relevant determinants.
• In this specific case, a useful life of 31 years is recognized for the rental property; the depreciation is therefore to be calculated on the basis of 31 years, not according to the standardized 2% rate.
• The allocation of the acquisition costs was bindingly set at 43.96% land and 56.04% building; the tax office must recalculate the tax.
• Cost ratio: 23% plaintiff, 77% tax office; judgment provisionally enforceable in this respect.

Facts of the case

The plaintiffs are jointly assessed for income tax. The plaintiff is the owner of several rental properties. He acquired the apartment building at issue in A-Straße ... in B by notarized contract dated ....2012 for total acquisition costs of ... €. The useful life of the property is now still in dispute for the purposes of calculating the depreciation for wear and tear (AfA).

The defendant assessed the plaintiffs with income tax assessments 2014 and 2015 dated 20.11.2017 and calculated the depreciation of the disputed building at 2%. The plaintiffs lodged an objection to the assessments in a letter dated 21.12.2017, which the defendant rejected in an objection decision dated 03.04.2020.

The plaintiffs filed an action on 26.04.2020. With regard to the last point still in dispute, they refer to the expert opinion submitted by them in the legal proceedings, which shows a remaining useful life of 31 years and the ruling of the BFH of 28.07.2021, case no. IX R 25/19.

According to the expert opinion prepared by the publicly appointed and sworn expert for the valuation of developed and undeveloped properties, rents and leases, Mr. C, he determined the residual useful life of modernized buildings on the basis of the Real Estate Valuation Ordinance (ImmoWertV) and the scheme for determining the residual useful life of modernized buildings ("Derivation of the economic residual useful life for residential buildings taking modernization into account", Annex 4, Model for the derivation of asset value factors, as at 21 June 2021).06.21), the remaining useful life. On more than 6 pages, the expert described in detail which modernization measures had taken place, such as the installation of thermal insulation in the roof, the replacement of the windows, the electrical sub-distribution, the replacement of the old oil heating system with a gas central heating system, etc. and evaluated each individual measure according to a points system. From this, he concluded a degree of modernization, which he expertly classified as "minor modernization in the context of maintenance". Due to the age of the building on the valuation date of around 55 years and a usual total useful life for buildings of this type of 80 years as a rule, as well as the modernizations carried out, the expert determined a modified economic remaining useful life of 31 years according to the model for deriving asset value factors.

The plaintiffs are now applying for

to amend the 2014 and 2015 income tax assessment notices, each last amended on 19.03.2021, and the associated objection decision dated 03.04.2020 to the effect that, in the case of income from renting and leasing the property "A-Straße ..., ... B" is depreciated for wear and tear on the basis of an allocation of the acquisition costs in the ratio of 43.96% to the land and 56.04% to the building and an actual useful life of 31 years.

The defendant requested

an allocation of the acquisition costs in the ratio of 43.96% to the land and 56.04% to the building and otherwise to dismiss the action.

He believes that a shorter remaining useful life than that requested was not established in the expert opinion submitted by the plaintiffs, as the term "remaining economic useful life" is not to be equated with the term "actual useful life" in Section 7 (4) sentence 2 EStG. The defendant's building expert, to whom the expert opinion was submitted, did not comment on the remaining useful life. Furthermore, the defendant did not raise any objections to the findings made by the expert within the framework of the model applied.

In a preparatory discussion meeting, the parties involved agreed on an allocation of the acquisition costs in the ratio of 43.96% to the land and 56.04% to the building. The defendant submitted a corresponding declaration of commitment.

At the hearing on 16.03.2022, the parties stated on the record that they would waive the oral hearing.

Reasons for the decision

The decision could be made without an oral hearing in accordance with Section 90 (2) of the German Fiscal Court Code (FGO).

The complaint is well-founded. The 2014 and 2015 income tax assessments are unlawful with regard to the calculation of the depreciation of the building in dispute and violate the rights of the plaintiffs (Section 100 (1) sentence 1 FGO). With regard to the allocation of the acquisition costs in the ratio of 43.96% to the land and 56.04% to the building, the parties involved had previously reached an agreement.

The actual useful life of the building, which is the only one still in dispute, is to be assumed to be 31 years.

1. in the case of assets whose use or utilization by the taxpayer to generate income is expected to extend over a period of more than one year, the portion of the acquisition or production costs that is attributable to one year if these costs are evenly distributed over the total period of use or utilization (depreciation in equal annual amounts, § 7 para. 1 sentence 1 EStG) is to be deducted for each year; the deduction is calculated according to the normal useful life of the asset (§ 7 para. 1 sentence 2 EStG). Deviating from this, the depreciation for a building used to generate income is determined according to the fixed percentages of § 7 para. 4 sentence 1 EStG; the regulation represents a legal standardization of the useful life within the meaning of § 7 para. 1 sentence 2 EStG.

In accordance with Section 7 (4) sentence 2 EStG, the depreciation corresponding to the actual useful life of a building can be applied instead of the depreciation in accordance with Section 7 (4) sentence 1 EStG. The useful life within the meaning of Section 7 (4) sentence 2 EStG is, in accordance with Section 11c (1) EStDV, the period during which a building can be expected to be used for its intended purpose. The useful life to be estimated is determined by technical wear and tear, economic depreciation and legal circumstances that may limit the useful life of an asset. The technical useful life, i.e. the period in which the asset is subject to technical wear and tear, is the starting point. If the economic useful life is shorter than the technical useful life, the taxpayer can invoke this. Whether the depreciation can be based on a shorter useful life than the standardized periods provided for by law (§ 7 para. 4 sentence 1 EStG) within the meaning of § 7 para. 4 sentence 2 EStG depends on the circumstances of the individual case (judgement of the Federal Fiscal Court --BFH-- of 04.03.2008 - IX R 16/07, BFH/NV 2008, 1310, with further references).

2. it is up to the taxpayer to demonstrate a shorter actual useful life in the individual case - within the framework of the duties of cooperation incumbent on him (see BFH ruling of 11.08.1993 - X R 82/90, BFH/NV 1994, 169) - and, if necessary, to provide evidence - within the framework of the burden of proof incumbent on him. The assessment of the circumstances presented by the plaintiffs in this respect is then the responsibility of the tax court as the court of fact in the appeal proceedings (established case law, see BFH rulings of 28.10.2008 - IX R 16/08, BFH/NV 2009, 899, and in BFH/NV 2008, 1310, in each case m.see also Hessisches FG, interim judgment of 14.05.2007 - 4 K 1716/04, EFG 2008, 202, confirmed by BFH judgment of 23.09.2008 - I R 47/07, BFHE 223, 56, BStBl II 2009, 986).

a) In order to demonstrate the shortened actual useful life of a building used to generate income, the taxpayer may use any method of demonstration that appears suitable in the individual case to provide the necessary evidence; in this respect, it is necessary that the taxpayer's explanations provide information about the relevant determinants - e.g. technical wear and tear, economic depreciation, legal restrictions on use-- which influence the useful life in the individual case, and on the basis of which the period in which the relevant building can probably be used in accordance with its intended purpose (§ 11c para. 1 EStDV) can be determined with sufficient certainty by means of an estimate.

b) The provision of § 7 para. 4 sentence 2 EStG grants the taxpayer a right of choice (Anzinger in Herrmann/Heuer/Raupach, § 7 EStG Rz 307; Blümich/Brandis, § 7 EStG Rz 524; Pfirrmann in Kirchhof, EStG, 19th ed, § 7 Rz 89; Bartone in Korn, § 7 EStG Rz 173), whether he is satisfied with the standardized depreciation rate in accordance with § 7 para. 4 sentence 1 EStG or claims and explains an actually shorter useful life. Within the scope of the official investigation to be carried out by the FA - in which all circumstances favorable to the parties involved are to be taken into account in accordance with § 88 para. 1 sentence 2 AO - the taxpayer's estimate is to be taken as a basis as long as it is based on considerations that a reasonably prudent taxpayer would normally make. Since the taxpayer's estimate does not require certainty about the shorter actual useful life, but at best the greatest possible probability, it is only to be rejected if it is clearly outside the appropriate estimation framework (cf. BFH ruling of 28.09.1971 - VIII R 73/68, BFHE 103, 468, BStBl II 1972, 176; Cologne tax court of 23.01.2001 - 8 K 6294/95, EFG 2001, 675, final; Waldhoff in Kirchhof/Söhn/Mellinghoff, EStG, § 7 Rz E 54).

Against this background, according to the case law of the BFH (BFH ruling of 28.07.2021 - IX R 25/19, BFH/NV 2022, 108), the submission of a building substance report, in particular the determination of the condition of real estate using the so-called ERAB method (method for determining the wear and tear of building materials), by the taxpayer is not a prerequisite for the recognition of a shortened actual useful life, even if such an expert opinion could possibly understand the technical "wear and tear" of a building in individual cases. This is because the ERAB method, which was only developed a few years ago and is used to record the condition of each relevant building element and represent it as a quantitative value, only defines a building material-specific value - the so-called wear and tear stock - with the help of quality and damage-related characteristics and associated characteristic values. This is primarily used to assess the quality of building elements for the development of individual maintenance strategies, taking into account existing ecological and economic framework conditions (see Schönfelder, Zustandsermittlung von Immobilien mittels Verfahren ERAB, 2012). Irrespective of the fact that the legislator could not have had the new ERAB procedure in mind when creating Section 7 para. 4 sentence 2 EStG, only a building fabric appraisal of this type can credibly demonstrate that the taxpayer's requirements in the context of the application of Section 7 para. 4 sentence 2 EStG; moreover, it is not apparent that the ERAB method can (also) provide information on the economic depreciation or any legal restrictions on use, which can also influence the required estimate of the useful life (likewise Blum/Weiss, Die steuerliche Betriebsprüfung 2020, 3, 6).

If the taxpayer or an expert commissioned by the taxpayer therefore chooses a different verification method for comprehensible reasons, this can - if necessary, taking into account appropriate adjustments (see BFH decision of 19.01.2018 - X B 60/17, BFH/NV 2018, 530) - be the basis for the estimation of a shortened actual useful life required in individual cases, provided that conclusions can be drawn from the chosen method about the determinants to be determined. Since only the greatest possible probability of a shorter actual useful life can be required in the context of the estimate, a narrowing of the expert opinion methodology or a commitment to a specific determination procedure would overstretch the requirements for the burden of proof (BFH ruling of 28.07.2021 - IX R 25/19, BFH/NV 2022, 108).

3. on the basis of the expert opinion submitted, the Senate has come to the conclusion that, taking into account all technical and economic circumstances, the useful life at the time of acquisition of the building in dispute was 31 years.

The Senate follows the expert's explanations, who convincingly estimated a remaining useful life in his expert opinion based on the model he used in accordance with Annex 4 (Model for deriving the remaining economic useful life for residential buildings taking into account modernizations) of the Property Value Directive.

The method used by the expert to determine the remaining useful life to derive the economic remaining useful life for residential buildings, taking into account modernizations on the basis of Annex 4 of the SW-RL, is not primarily aimed at determining the actual useful life within the meaning of Section 7 (4) sentence 2 EStG. As the BFH has already ruled, the fact that the calculation method used by the expert is only based on a model economic remaining useful life is not of decisive importance for the method applied in the case in dispute. This is because it is not apparent that the appropriate estimation framework pursuant to Section 7 (4) sentence 2 EStG was thereby abandoned, as the required estimate is ultimately only concerned with proving that the typical useful life to be assumed by law is incorrect in the individual case and that a shorter useful life is to be assumed with the greatest possible probability BFH ruling of 28.07.2021 - IX R 25/19, BFH/NV 2022, 108).

In this respect, the defendant's semantic objection that the term "economic remaining useful life" is not to be equated with the term "actual useful life" in Section 7 para. 4 sentence 2 EStG cannot be accepted. As already stated by the Düsseldorf tax court (Düsseldorf tax court, judgment of July 12, 2019 - 3 K 3307/16 F, EFG 2019, 1673), it is true that the determination of the remaining useful life is only a necessary intermediate step in determining the value of the building in the context of determining the market value, but is the main purpose in the context of Section 7 (4) sentence 2 EStG. However, the Senate is not able to construe a difference between the (remaining) useful life within the meaning of Section 7 (4) sentence 2 EStG and the remaining useful life within the meaning of Section 6 (6) ImmoWertV (see also Cologne tax court, judgment of 30.6.2016 11 K 3657/14, juris). Rather, the concept of the (remaining) useful life, i.e. the remaining useful life, is not a fiction in both contexts, despite the need for an estimate - which may have to be determined differently. Rather, the question to be answered in both cases is how many years the building can still be expected to be used commercially in its existing condition. This is just as important for the question of the market value as it is for the question of the appropriate allocation of expenses. As Section 7 (4) sentence 2 EStG is not only based on the remaining technical useful life, but the taxpayer can also rely on a shorter economic useful life, it is not comprehensible to what extent there could be an economic useful life "from an income tax perspective" that differs from the economic useful life "from a market value perspective" and how this should be determined. Since Section 7 (4) sentence 2 EStG generally gives the taxpayer the option of providing evidence of a shorter useful life, the Senate is of the opinion that this evidence must in any case be provided using a method recognized by experts.

The defendant did not raise any objections to the detailed findings made by the expert within the framework of the model applied. It is also not obvious on what grounds the submitted expert opinion could be objected to and the estimation framework was left in the present case. For each modernization measure, the appraiser has comprehensibly listed which modernization measure is involved, classified and evaluated it within a fixed range of points for each modernization element using the model of the expert committee described above. For example, for the modernization element "Modernization of windows and exterior doors", the expert awarded one point out of a possible maximum score of two for the replacement of windows made of plastic with insulating glazing or in the store made of metal or wood with insulating glazing. In total, the expert calculates a score of 4 points out of a possible 20 points. Modernization elements such as thermal insulation of the exterior walls, modernization of the interior fittings, etc. are awarded zero points. Appendix 4 to the model described above shows the modified remaining useful life in points based on the age of the building and the degree of modernization. Linear interpolation results in a modified economic remaining useful life of 31 years according to his presentation.

4. the calculation of the income tax to be determined is imposed on the defendant in accordance with § 100 para. 2 sentence 2 FGO.

5. the decision on costs follows from § 136 para. 1 sentence 1 FGO.

6. the decision on provisional enforceability is based on §§ 151 Para. 3, 155 FGO in conjunction with §§ 708 No. 10, 708 Para. 1 Sentence 1 FGO. §§ 708 No. 10, 711 of the Code of Civil Procedure.

https://nrwe.justiz.nrw.de/fgs/koeln/j2022/6_K_923_20_Urteil_20220323.html