Judgment of the Düsseldorf Fiscal Court dated August 16, 2023, Ref.: 2 K 2449/18 E

• Expenses for renovations and repairs that are incurred within three years of the acquisition of a rented apartment building and exceed the 15% net limit of the building share are to be treated as acquisition-related production costs and increase the AfA assessment basis; since the 2016 BFH ruling, this also regularly includes cosmetic repairs and the elimination of age-related or hidden defects, provided that no exclusively subsequent, external damage event is substantiated.

• In the absence of a contractual allocation, the purchase price allocation between land and building is based on actual market values; in the case of rented apartment buildings, the asset value method is generally decisive, based on the reporting date, and subsequent rent increases or DCF considerations do not change either the allocation or the 15% test .

• In the specific case, the recognized measures (including painting/tiling work, heating cost allocators, pipe burst repair after insurance payment, oil tank measure) exceeded the 15% limit and were therefore added to the AfA assessment basis; only minor corrections to AfA and minor income-related expenses led to minor relief, the action was otherwise dismissed .

Facts of the case

In dispute is the allocation of the purchase price for a rented apartment building for the purpose of determining the depreciation for wear and tear (AfA) and whether immediately deductible maintenance expenses or acquisition costs exist.

The plaintiffs are husband and wife and are jointly assessed for income tax. They acquired the H.-straße property in G. by notarized purchase agreement dated 08.06.2012. The property is developed with an apartment building built around 1961 and used for third-party residential purposes. The purchase price amounted to EUR 395,000. The incidental acquisition costs amounted to EUR 37,100.43. The property is ... square meters in size, of which ... sqm. The property has a total of ... residential units with a total of approx. ... sqm, spread over four floors (ground floor, 1st and 2nd floor and attic). The property also includes a rented garage. The benefits and encumbrances of the property were transferred to the plaintiffs in July 2012.

In the tax return for the 2012 tax year, the plaintiffs declared rental income from the H.-straße property in the amount of EUR 12,773.00 and depreciation calculated pro rata temporis from July 2, 2012 (= 6/12) based on a straight-line depreciation rate of 2% and an assessment basis of EUR 303,636.97, whereby they assumed a building share of 70.27% (EUR 432,100.43 * 70.27%). In addition, they declared immediately deductible maintenance expenses in the gross amount of EUR 52,191 in addition to other income-related expenses of EUR 3,727 that were not in dispute. This includes, among other things, expenses for the renewal of the electrical installation in the 2nd floor apartment (EUR 4,165 gross), the renewal of the meter system in the 2nd floor apartment (EUR 2,075.36 gross), the repair of burst pipes in the water and wastewater risers in the bathroom and kitchen in the 2nd floor apartment (EUR 1,707.36 gross), the repair of the water and wastewater risers in the bathroom and kitchen in the 2nd floor apartment (EUR 1,707.36 gross). OG (EUR 1,707.65 gross, work carried out on 13.07. and 16.07.2012), the renewal of the bathrooms and radiators in the 2nd floor apartment (EUR 10,240.82 gross), the work on doors, tiles and laminate as well as painting work by company X. (EUR 15,000.00 and EUR 18,500.00 gross) and for the installation of heat cost allocators on the new heating systems by company S. in the amount of EUR 108.17 gross.

The rental income declared from the H.-straße property amounted to a total of EUR 46,182.00 for the 2012 year of dispute.

When determining the value of the building, the plaintiffs assumed a standard land value of ...,- EUR/sqm and set this value (EUR 117,450.00) in relation to the purchase price paid of EUR 395,000.00 (= property 29.73 %). The defendant recognized the income from the H.-straße property in accordance with the declaration. The 2012 tax assessment was made subject to review (Section 164 (1) of the German Fiscal Code - AO).

The claimants received a reimbursement payment of EUR 1,500 from their insurance company for the repair of the burst pipes in 2012. The plaintiffs had not taken the reimbursement payment into account in their declared income of EUR 46,182.

In the tax returns submitted to the defendant in 2015 for the years in dispute 2013 and 2014, the plaintiffs declared rental income for the H.Strasse amounting to EUR 38,905.00 (in 2013) and EUR 39,679.00 (in 2014) and - in addition to other, non-disputed income-related expenses amounting to EUR 14,265.00 (2013) and EUR 8,094.00 (2014) - maintenance expenses of EUR 111.00 (2013) and EUR 6,293.00 (2014). The maintenance expenses for 2014 included, among other things, expenses for the repair of a leak in the oil tank in the gross amount of EUR 5,820.29 and expenses for a purchase from Z. in the amount of EUR 13.97. The (straight-line) depreciation claimed amounted to EUR 6,073.00 per year.

The rental income declared from the H.-straße property for 2013 amounted to a total of EUR 18,456 and EUR 19,219 for 2014.

In 2015, the plaintiffs incurred further maintenance expenses of EUR 632.71 on the H.-straße property (invoice dated February 8, 2015 for heating maintenance of EUR 209.07; invoice dated September 20, 2015 for the repair of the light switch in the stairwell of EUR 423.64).

The defendant was of the opinion that the claimed maintenance expenses for the years 2012 to 2014 were acquisition-related expenses within the meaning of Section 6 (1) no. 1a of the German Income Tax Act (EStG), which were to be allocated to the production costs of the building.

On 21.04.2016, the defendant issued a correspondingly amended assessment for the 2012 year of dispute based on Section 164 (2) AO. In it, it no longer recognized the maintenance expenses in the amount of EUR 52,191 as income-related expenses and instead increased the assessment basis for depreciation (AfA assessment basis). The defendant also did not recognize the maintenance expenses of EUR 111 for the 2013 year in dispute and EUR 6,293 for the 2014 year in dispute as immediately deductible expenses in the (initial) assessments for 2013 and 2014 dated 21.04.2016 and also increased the AfA assessment basis in this respect. The defendant then assessed the income for 2013 from the H.-straße property at EUR 17,396. The assessments for 2013 and 2014 were issued subject to the reservation of subsequent review; the reservation of subsequent review for 2012 remained in place. In addition, the assessments with regard to income from letting and leasing were made provisionally because the allocation of the acquisition costs of the H.-straße property could not yet be conclusively examined.

The plaintiffs lodged an appeal against the assessment notices dated 21.04.2016, arguing that the 15 % limit was not exceeded due to the maintenance expenses incurred. The declared maintenance expenses consisted of "maintenance expenses" amounting to EUR 40,326.99 net and "expenses for cosmetic repairs" amounting to EUR 8,912.11 net. The expenses for the company X. included painting work in the amount of EUR 8,000, which was to be allocated to the cosmetic repairs - according to the claimants in the attachment to the letter of objection dated 11.05.2016 - or to the administrative costs - according to the claimants in the letter dated 19.06.2017: work had not been carried out or letter from the claimants dated 02.11.2017: there was a double payment of cosmetic repairs in the amount of EUR 4,000 net.

During the objection proceedings, the plaintiffs commissioned an expert opinion on the market value (market value) within the meaning of Section 194 of the German Building Code (Baugesetzbuch) from the expert committee for property values of the city of G. According to the experts, the total value of the property determined using the income capitalization approach amounted to EUR 380,000, of which EUR 117,450 (= 30.83%) was attributable to the land and the remainder (= 69.17%) to the building. For further details, please refer to the expert opinion dated 30.03.2017.

According to the plaintiffs with reference to the expert opinion of March 30, 2017, the 15 % limit is EUR 44,832.58 (EUR 432,100.43 * 69.17 % * 15 %) and is not exceeded. The actual cosmetic repairs carried out by company X. would only amount to EUR 4,760 gross. The second payment of EUR 4,760 to company X. was a double calculation and payment. A reclaim had failed due to the company's insolvency. The expenses incurred in 2012 for the pipe bursting work in the gross amount of EUR 1,707.65 and the costs incurred in 2014 for the oil tank renewal in the gross amount of EUR 5,820.29 were - contrary to their previous statements - neither cosmetic repairs nor maintenance expenses, but extraordinary expenses. The oil tank had had to be replaced spontaneously and unexpectedly due to a sudden leak. The leak was a hidden defect.

The expenses for the company S. (EUR 501.53 gross in 2012), for the small amount invoices for the garden (EUR 111.05 gross in 2013) and for the companies D. and Y. (EUR 458.85 gross in 2014) were not attributable to maintenance expenses. Contrary to their previous allocation in the annex to their letter dated 11.05.2016, the heating cost allocators related to the apportionable heating costs and were also not to be included.

On 20.09.2016, the income tax assessments for 2013 and 2014 were amended for reasons not in dispute here. The reservations of the review and the provisional nature remained in place.

With the transfer agreement dated 25.06.2018, the plaintiffs transferred ownership of the H.-straße property to their two children and reserved a usufructuary right.

In an objection decision dated 6 August 2018, the defendant reduced the plaintiffs' income from letting and leasing for the H.-straße property to EUR 5,162.00 for 2012 and to EUR 24,028.00 for 2014; for 2013, it increased the income to EUR 17,547.00 without hearing the plaintiffs in advance. In doing so, the defendant assumed an AfA assessment basis of EUR 349,080.98 (in 2012 and 2013) and EUR 354,915.24 (in 2014). It recognized 2% depreciation for 2012 in the amount of EUR 3,491 (= 6/12), for 2013 in the amount of EUR 6,982 and for 2014 in the amount of EUR 7,098. He also recognized income-related expenses of EUR 393.00 in 2012, EUR 111.00 in 2013 and EUR 459.00 in 2014. Otherwise, it rejected the appeals as unfounded.

In justification, he stated that the expenses incurred in 2012 for the "repair of burst pipes" were to be allocated to maintenance expenses. The term "expenses for repair and modernization measures" within the meaning of Section 6 para. 1 no. 1a EStG also includes measures that eliminate defects or damage to a building. It was irrelevant whether the damage in the present case had already occurred at the time of acquisition or only occurred in the 3-year period pursuant to Section 6 (1) no. 1a EStG. According to the information on the invoice, the payments made to company X. were also directly related to the "H.-straße, G. apartment refurbishment". There were no indications that some of the work carried out was not part of the apartment refurbishment. The total gross invoice amounts of EUR 15,000.00 and EUR 18,500.00 from company X., including the expenses for painting work of 2 * EUR 4,760.00 gross, were to be attributed to maintenance expenses within the meaning of § 6 para. 1 no. 1a EStG. The costs for the installation of heat cost allocators also did not meet the exception criteria of Section 6 para. 1 no. 1a sentence 2 EStG and were to be included in the calculations within the scope of acquisition-related expenses. The same applies to the expenses for the oil tank renewal. There were no indications that the elimination of the burst pipe or the leak in the oil tank or the painting work was connected to material damage that had been willfully caused by a third party. The judgments of the Federal Fiscal Court (BFH) from 14.06.2016 (case no. IX R 6/16 and IX R 24/16) are not applicable to the case in dispute. The 15 % limit within the meaning of Section 6 para. 1 no. 1a EStG amounts to EUR 44,832.58 - as most recently submitted by the plaintiffs themselves - and has been exceeded.

The reservation of the review with regard to the assessments for 2013 and 2014 remained in place. With regard to the 2012 year in dispute, the defendant pointed out that the reservation pursuant to Section 164 (4) AO had lapsed.

On 30.08.2018, the plaintiffs filed an appeal against the objection decision. They argued that the expenses for painting work/beauty repairs in the gross amount of EUR 4,760.00 could not be regarded as extraordinary beauty repairs in accordance with the BFH ruling of 25.08.2009 (IX R 20/08), as these were carried out in parts of the building that had not been renovated. The renovation expenses carried out were also not a complete renovation. The new case law of the BFH was not applicable. They - the claimants - could not have known in 2012 that the BFH would change its previous legal opinion. For this reason, the BFH itself added on 20.10.2017 that the new case law should only apply to acquisitions from 01.01.2017.

The BFH ruling from 09.05.2017 (IX R 6/16) also states that expenses for repairing damage that occurred after the purchase are immediately deductible income-related expenses. This decision was to be applied to the burst pipe in the amount of EUR 1,707.65, the double invoice from company X. for the painting work in the amount of EUR 4,760 and the leak in the oil tank repaired by company R. in the amount of EUR 5,820.29. The burst pipe had occurred during the renovation of the 2nd floor apartment and had been caused there by a tradesman. In this respect, a third party was culpably responsible for this damage. It could also be assumed that a tradesman was partly responsible for the leak in the oil tank. Irrespective of this, the only decisive question here is whether the damage was already present at the time of purchase. In the case of a leak in the oil tank, which is serviced every year, this could not be assumed any more than in the case of a burst pipe. In its ruling of 13.03.2018 (IX R 41/17), the BFH once again confirmed that unsuspected expenses incurred to rectify damage that did not exist at the time of purchase are not part of the acquisition costs. The 3-year rule was not applicable here.

The double payment to company X., which had fraudulently invoiced services twice, was a bad debt loss. In any case, however, these EUR 4,760.00 were not attributable to the renovation of the 2nd floor apartment. Rather, the amount of EUR 4,000 would normally have been incurred for maintenance expenses, e.g. for painting a hallway etc.

The building value determined in the appraisal by the expert committee for property values in the city of G. and applied to date should be corrected, as the rent stated there was too low. If the legislator with § 6 para. 1 no. 1a EStG and subsequently the tax authorities as the executive make the generalizing assessment that expenses within three years of acquisition in the amount of 15% of the acquisition costs of the building lead to an increase in the value of the building, then the increase in the value of the building must also be taken into account in the context of determining the value of the building in the income capitalization approach by including the higher annual income achievable through the expenses incurred. In the previous determination of the expert committee, maintenance measures determined on a flat-rate basis and thus the increase in value due to renovation measures carried out were taken into account. The same should then also apply to rising rents. The possibility of taking rising rents into account was created by the legislator with the valuation in accordance with § 17 para. 1 sentence 2, para. 3, § 18 para. 2 sentence 2 of the Ordinance on the Principles for Determining the Market Values of Real Estate and the Data Required for Valuation - ImmoWertV. Insofar as no periodically varying income is applied in the context of the determination according to the income capitalization approach, counter-evidence in the form of an opening clause must be permissible in order to avoid a violation of Article 3 (1) of the Basic Law. Furthermore, the classification of the residential location in the expert committee's report was incorrect. H.-straße is located in a good residential area and should be assessed with 108 points instead of the previous 100 points. The building share was then 78.43 % and the 15 % limit was EUR 60,491.00 (calculation according to the plaintiff: EUR 432,100.43 * 78.43 % * 15 % * 1.19).

In accordance with the order of August 3, 2022, amended by the order of September 8, 2022, the court took evidence by obtaining an expert opinion from the publicly appointed and sworn expert N. on the market values of the building and the land of the property H.-straße in G.. For details, please refer to the content of the written expert opinion dated 22.03.2023 (p. 381 to 525 GA).

The plaintiffs provide additional information on the expert opinion of 22.03.2023: According to the expert opinion, the usual annual maintenance costs (= maintenance work) would be EUR 14.91/sqm for the living space including the former kiosk, and EUR 88 per garage/parking space per year. This would result in an annual value of EUR 5,428. These annual, customary maintenance expenses would have reduced the income value of the building. In order to avoid a double burden for the purchaser, a reduction must now be made in the actual maintenance expenses in order to comply with the legislative intention that any existing investment backlog be taken into account when determining the depreciable acquisition costs for the building and directly deductible maintenance expenses. In the present case, without the reduction of the usual annual maintenance expenses of EUR 5,428, the value of the building would be EUR 373,250 (EUR 14,206 + EUR 5,428 = EUR 19,634 * multiplier 19.0104). This results in a 15% limit of EUR 55,987.00 (EUR 373,250.00 * 15%), which is not exceeded by the maintenance expenses incurred. It should be noted that the review intended by the legislator as to whether there had been a reduction in the purchase price due to an investment backlog did not exist.

Furthermore, the market value appraisal of 22.03.2023 carried out a key date appraisal without taking into account the higher annual rents of EUR 29,528.00 already paid in 2012. Based on the annual cold rents of EUR 29,528 and the calculation method on page 102 of the market value appraisal, this results in a building value of EUR 318,139 and an unexceeded 15 % limit of EUR 47,720 (EUR 318,139 * 15 %).

Finally, the plaintiffs claim that the applicable straight-line depreciation rate should be recalculated in view of the remaining useful life of the building of only 45 years determined in the expert opinion and that the previously applied depreciation rate of 2 % should be increased accordingly.

The plaintiffs apply for

to calculate the income from letting and leasing for the disputed property based on a land value of EUR 117,450.00 and a building value of EUR 373,250.00 (= building share 76.06 % of the total purchase price) and to allow the expenses declared as maintenance expenses to be deducted immediately,

in the event of losing the appeal, to allow the appeal on points of law.

The defendant requested

dismiss the action.

It essentially refers to its statements in the objection decision and additionally submits that the annual market rents of EUR 26,580 set by the expert committee are not objectionable in view of the rental income actually achieved by the plaintiffs. Future rental income was irrelevant in this context.

For the application of § 6 para. 1 no. 1a EStG, it was not important whether a complete renovation had taken place. The term "repair and modernization measures" within the meaning of Section 6 para. 1 no. 1a EStG includes all structural measures through which defects or damage to existing facilities of an existing building or to the building itself are eliminated or through which the building is brought up to date through renovation. It was not comprehensible why no compensation had been claimed for damage caused by the tradesmen and why there had even been an insurance reimbursement in the case of the burst pipe. Invoices for EUR 15,000.00 and EUR 18,500.00 gross had been received from company X. for the "H.-straße, G. apartment renovation"; these had also been paid in full by the plaintiffs.

For further details, reference is made to the exchanged written pleadings and the administrative files of the defendant and the building file of the city of G. which have been included.

Reasons for the decision

I. The admissible action is well-founded to the extent described above. The contested income tax assessments for 2012 to 2014 in the form of the objection decision of August 6, 2018 are unlawful and violate the plaintiffs' rights insofar as the defendant overstated the income from renting and leasing from the H.-straße property by EUR 424 in the 2012 year in dispute, by EUR 848 in the 2013 year in dispute and by EUR 876 in the 2014 year in dispute. Otherwise, the assessments are lawful and do not infringe the plaintiffs' rights (Section 100 (1) sentence 1 FGO). The defendant assessed the depreciation for 2012 in the amount of only EUR 3,491 instead of EUR 3,915 (difference EUR 424), the depreciation for 2013 in the amount of only EUR 6,982 instead of EUR 7,830 (difference EUR 848) and the depreciation for 2014 in the amount of only EUR 7.098.00 instead of EUR 7,960.00 (difference EUR 862.00) and the immediately deductible income-related expenses within the meaning of Section 9 (1) sentence 1 EStG for 2014 by EUR 14.00 too low.

(1) The contested objection decision relating to the 2013 year in dispute is not unlawful solely due to the omission of an express notice of rectification pursuant to Section 367 (2) sentence 2 AO.

Pursuant to Section 367 (2) sentence 2 AO, an administrative act can be amended to the detriment of the appellant if the latter has been informed of the possibility of an appeal decision, stating reasons, and has been given the opportunity to comment on this. Exceptionally, however, the omission of such notification is harmless if the contested tax assessment can be amended to the detriment of the objector even after the objection has been withdrawn, e.g. because - as in the present case - it was issued subject to review (Section 164 (1) AO) (BFH ruling of 10.11.1989 VI R 124/88, Federal Tax Gazette Part II - BStBl II - 1990, 414). Something different only applies if the other possibility of amendment only (still) exists because the assessment period has been suspended by the objection in accordance with Section 171 (3a) AO (BFH ruling of 25.02.2009 IX R 24/08, BStBl II 2009, 587).

In the present case, the defendant increased the income for 2013 from the rental of the H.-straße property from EUR 17,396.00 to EUR 17,547.00 (difference + EUR 151.00) with the objection decision of 06.08.2018. The claimants were not heard in advance. This was exceptionally harmless in the case in dispute. The tax assessment for 2013 was subject to review and a change would have been possible without further ado even if the objection had been withdrawn in accordance with Section 164 (2) AO. At the relevant time when the objection decision was issued on 06.08.2018, the (regular) assessment period had not yet expired and the reservation of the review had not lapsed in accordance with Section 164 (4) AO.

2. the income from letting and leasing the H.-straße property to be included in the calculation of income tax amounted to a total of EUR 4,738.00 in the 2012 year in dispute, a total of EUR 16,699.00 in the 2013 year in dispute and a total of EUR 23,152.00 in the 2014 year in dispute.

When determining income, depreciation in the amount of EUR 3,915 (2012), EUR 7,830 (2013) and EUR 7,960 (2014) must be taken into account. In order to determine the aforementioned depreciation amounts, the total acquisition costs must be allocated to the land and the building on the basis of the (market-adjusted) market values determined by the expert N. using the asset value method (see b). The modernization expenses incurred by the plaintiffs in the years in dispute 2012 and 2014 in the total amount of EUR 56,117.29 (gross; of which EUR 50,297.00 in 2012 and EUR 5,820.29 in 2014) are to be allocated to the building portion (see c). The applicable depreciation rate is 2.22 % per year in accordance with Section 7 (4) sentence 2 EStG (see d). In the 2014 year of dispute, further immediately deductible income-related expenses in the amount of EUR 13.97 are to be recognized (see f).

a) According to Section 21 (1) sentence 1 no. 1 EStG, income from letting and leasing includes income from letting and leasing immovable assets, in particular land and buildings. Income is determined on the basis of the surplus of income over income-related expenses (Section 2 (2) sentence 1 no. 2 EStG). Income-related expenses are expenses incurred to acquire, secure and maintain income (Section 9 (1) sentence 1 EStG). They are not immediately deductible if they are acquisition or production costs. In this case, they can only be taken into account as part of depreciation (Section 9 (1) sentence 3 no. 7 in conjunction with Section 7 EStG). Production costs include the following in accordance with Section 9 para. 5 sentence 2 in conjunction with Section 6 para. § Section 6 para. 1 no. 1a sentence 1 EStG also includes expenses for repair and modernization measures that are carried out within three years of the acquisition of the building if the expenses, excluding VAT, exceed 15% of the acquisition costs of the building (so-called acquisition-related production costs). Pursuant to Section 6 (1) no. 1a sentence 2 EStG, only expenses for extensions within the meaning of Section 255 (2) sentence 1 of the German Commercial Code (HGB) and expenses for maintenance work that are normally incurred annually are excluded from this.

The term "expenses for repair and modernization measures" generally includes all expenses for construction measures on an existing building that eliminate defects or bring the building up to date. Expenses within the meaning of § 6 para. 1 no. 1a sentence 1 EStG include, in particular, expenses for the repair or renewal of existing sanitary, electrical and heating systems, floor coverings, windows and roofing, which - without the provision of § 6 para.1 no. 1a sentence 1 EStG - would in principle be assessed as immediately deductible maintenance expenses (see BFH ruling of 14.06.2016 IX R 25/14, BStBl II 2016, 992). Since the aforementioned ruling of the BFH of 14.06.2016, this also includes so-called cosmetic repairs such as wallpapering, painting or whitewashing walls and ceilings, painting floors, radiators, interior and exterior doors and windows. In this respect, the BFH has continued its case law on the inclusion of cosmetic repairs in acquisition-related production costs within the meaning of Section 6 para. 1 no. 1a sentence 1 EStG and has maintained its previous case law (see judgment of 25.08.2009 IX R 20/08, BStBl II 2010, 125) in view of the wording of the law, the systematic context of sentences 1 and 2 and the purpose pursued by the legislator with the provision of Section 6 para. 1 no. 1a sentence 1 EStG.

§ Section 6 para. 1 no. 1a sentence 2 EStG does not generally exclude certain expenses for maintenance work from the scope of sentence 1, but only subject to the restriction that these are usually incurred annually. Conversely, expenses generally referred to as maintenance expenses are also covered by sentence 1 of the provision if they are incurred within three years of the acquisition of the building and the amount, excluding VAT, exceeds 15% of the building acquisition costs. In addition, work that is usually carried out annually must also be included in the review of the 15% limit if it is incurred as part of uniformly assessed repair and modernization measures within the meaning of Section 6 (1) no. 1a sentence 1 EStG.

In general, the tax authority bears the burden of proof for all taxable facts and the taxpayer bears the burden of establishing all tax reductions and exemptions that benefit him. This means that in the case of the differentiation of maintenance costs from production costs, the tax authority bears the risk that the facts cannot be clarified. If it cannot be determined whether the repair and modernization work has led to production costs, the transaction must be classified as a maintenance expense. However, the taxpayer has an increased duty to cooperate in accordance with Section 90 (1) sentence 3 AO.

b) If a total purchase price has been paid for the acquisition of a plot of land with an existing building, the purchase price must be divided into a land value and a building value for the purposes of determining both the depreciation and the 15% limit. However, neither § 6 para. 1 no. 1a EStG nor § 255 HGB regulate how a uniform purchase price is to be allocated to the individual assets. As there is no apparent objective reason for a different approach, the Senate refers back to the case law of the BFH on purchase price allocation in the context of determining the depreciation assessment basis (also: Düsseldorf Fiscal Court, judgment of 19.01.2016, 13 K 1496/13 E, EFG 2016, 711 with note by Wendt). The following applies:

aa) If a purchase price allocation was made in the purchase agreement, these agreed and paid acquisition costs are generally also to be used as the basis for taxation (established case law, see only BFH ruling of 21.07.2020 IX R 26/19, BStBl II 2021, 372). If there is no such agreement - as in the present case - the apportionment must be made in accordance with an overall assessment of the circumstances by apportioning the real market values of the land and building. When allocating a total purchase price, the land and building value must first be determined separately and then the acquisition costs must be divided into acquisition costs for the land and building share in proportion to the two value shares. The ImmoWertV can be used to estimate the value of the land and building portion (BFH ruling of 21.07.2020 IX R 26/19, BStBl II 2021, 372). According to this, the market value is to be determined using the comparative value method (including the method for determining the land value), the capitalized earnings value method, the asset value method or several of these methods (Section 8 (1) sentence 1 ImmoWertV). Which of these valuation methods is to be used is to be decided according to the actual circumstances of each individual case. The valuation methods are equivalent to each other (see BFH ruling of 21.07.2020 IX R 26/19, BStBl II 2021, 372 with further references).

According to the established case law of the BFH, which the Senate follows, a purchase price allocation using the asset value method is generally appropriate for owner-occupied and rented condominiums (as private assets) and multi-family houses - as in the present case (BFH ruling of 29.10.2019, IX R 39/17, BFH/NV 2020, 681; decisions of 27.11.2017, IX B 144/16, BFH/NV 2018, 218, and of 29.05.2008, IX R 36/06, BFH/NV 2008, 1668). For these types of property, it can generally be assumed that, in addition to income aspects and the secure capital investment, the prospect of a long-term tax-free increase in the value of the assets is also decisive for the acquisition (BFH rulings from 29.10.2019, IX R 39/17, BFH/NV 2020, 681, and from 29.05.2008, IX R 36/06, BFH/NV 2008, 1668). A valuation using the capitalized earnings value method is - exceptionally - possible if, in the opinion of the court, this leads to the more accurate value and better reflects the actual value conditions (see BFH rulings from 29.10.2019, IX R 39/17, BFH/NV 2020, 681, and from 29.05.2008, IX R 36/06, BFH/NV 2008, 1668; ruling from 15.11.2016, IX B 98/16, BFH/NV 2017, 292). Particularly in the case of properties let for office or other commercial purposes (so-called commercial properties), the supreme court case law tends to affirm that the capitalized earnings value method takes precedence.

bb) In accordance with these principles, the asset value method, which generally takes precedence, is to be applied in the present case. There are no apparent reasons to deviate from this priority relationship of the asset value method in the case in dispute. The background to a purchase decision or subsequent conduct by the plaintiffs alone - in this case, the transfer of the property to their children in 2018 subject to a usufructuary right - do not justify a deviation from determining the market values using the asset value method. In the case in dispute, it is also not otherwise apparent that the application of the asset value method would lead to an inappropriate result or that the capitalized earnings value method would lead to a more accurate value or better reflect the actual value conditions. In particular, the market values determined in the income capitalization approach by both the expert committee of the city of G. (market value in the income capitalization approach: EUR 380,000.00) commissioned by the plaintiffs and the experts commissioned by the court (market value in the income capitalization approach: EUR 387,000.00) differ only insignificantly from the market value determined in the asset value approach (EUR 388,000.00).

cc) With regard to the amount of the shares of land and building in the total acquisition costs, the Senate follows the comprehensible and convincing explanations of the expert N. in her written market value report dated 22.03.2023. The expert determined the objective circumstances on site, correctly presented the method for determining the market value of the property in the asset value method and then applied it to the specific case in dispute. The expert opinion is structured, comprehensible and the expert's findings are convincingly substantiated in each case. For further details, reference is made to the content of the expert opinion and in particular to the calculation of the market value in the asset value procedure on pages 79, 91 f., 109, 112 of the expert opinion (pages 459, 471 f., 489, 492 GA). The parties have not raised any substantiated objections to the determination of the market value carried out in the asset value procedure.

dd) Insofar as the plaintiffs believe that higher rental income should be taken into account in the determination on page 102 of the expert opinion dated 22.03.2023, this does not lead to a different valuation. The asset value method to be applied in the case in dispute is not based on rental income, but on the asset values of the buildings, so that changes in rental income do not in themselves have any effect on the asset values.

In addition, the market value is determined for the purpose of purchase price allocation as at the reporting date and not - even within the scope of Section 6 (1) No. 1a EStG - dynamically in the event of any change in rental income or any change in market values in the (three) years following the acquisition. Subsequent rent increases have no effect on the purchase price allocation or calculation of the 15% limit, nor do changes in market value in the years following acquisition.

Nothing to the contrary arises from the provision of § 17 para. 1, 3 ImmoWertV (in the version of 19.05.2010, valid until 31.12.2021; hereinafter: old version) referred to by the plaintiffs. Paragraph 3 provides for an income capitalization approach based on periodically varying income (so-called discounted cash flow method - DFC). Irrespective of the fact that the regulation is included under the subsection "income capitalization approach", which - as explained - is not applicable in the present case, the application of the regulation pursuant to Section 17 (1) sentence 2 ImmoWertV (old version) requires in any case that the income situation is foreseeably subject to significant changes or deviates significantly from the usual market income. It has neither been demonstrated nor is it otherwise apparent that this is the case here. Furthermore, the methodology of the aforementioned DCF method also speaks against its application to the present dispute. The starting point of the DCF method is an estimate of the period-related net cash flow for a certain period of time, which is referred to as the detailed observation period. A detailed cash flow forecast is usually prepared for a period of between 5 and 15 years (Rixner/Biedermann/Charlier in: Rixner/Biedermann/Charlier, Systematischer Praxiskommentar BauGB/BauNVO, 3rd ed. 2018, § 17 ImmoWertV Ermittlung des Ertragswerts, para. 17). This approach appears to the Senate to be inappropriate for the purchase price allocation of the multi-family house acquired here with ... residential units. The DCF method takes into account the current rental income, contractual rent adjustment clauses, rent losses following the expiry of a rental agreement, the (expected) market rent on the day of a subsequent rental and the expected rent adjustment clauses for new rental agreements following re-letting as the starting point for determining the expected period-related net cash flows (Rixner/Biedermann/Charlier in: Rixner/Biedermann/Charlier, Systematischer Praxiskommentar BauGB/BauNVO, 3rd ed. 2018, § 17 ImmoWertV Ermittlung des Ertragswerts, margin no. 18). In addition to the complexity and the high level of detail of this DCF method, extensive assumptions must be made in this respect, which in themselves demonstrate a high potential for error and, at least in the present case of the purchase price allocation for a property let for residential purposes, lead to unsuitability for the purposes of an (estimated) purchase price allocation. There are also no indications for the determination of the observation period to be used as a basis for the DCF method.

ee) The expertly determined building value share (EUR 271,550.00) is in a ratio of 69.99% to 30.01% of the determined (market-adjusted) market value of EUR 388,000.00 in total.

This results in a share of EUR 302,427.00 (EUR 432,100.43 * 69.99%) of the total purchase price for the H.-straße property attributable to the building.

c) The maintenance expenses incurred by the plaintiffs in the years in dispute 2012 and 2014 in the total gross amount of EUR 56,117.29 (= EUR 47,157.38 net) are to be allocated to the acquisition costs of the building. In this respect, these are acquisition-related production costs within the meaning of Section 6 para. 1 no. 1 letter a EStG. In the case in dispute, the 15 % limit amounts to EUR 45,364.00 (= EUR 302,427.00 * 15 %) and was exceeded.

aa) Contrary to the plaintiffs' view, no teleological reduction of § 6 para. 1 no. 1a EStG can be considered to the effect that the possibility of rising rents must be taken into account when examining compliance with the 15% limit. The fact that - as explained above - the amount of rental income is not relevant in the asset value method to be applied here already speaks against such an inclusion. Irrespective of this, the plaintiffs' view contradicts the meaning and purpose of § 6 para. 1 no. 1a EStG, which is a simplification provision. With § 6 para. 1 no. 1a EStG, the legislator wanted to counter the case law of the BFH at the time (judgment of 12.09.2001, IX R 39/97, BStBl II 2003, 569), according to which a case-by-case assessment was always required to differentiate between acquisition and production costs and maintenance costs. The legislator wanted to avoid the resulting considerable additional workload for the tax authorities by creating a standardized regulation based on the previous administrative regulation, which leads to acquisition-related production costs solely because the expenses exceed a certain amount in the first three years after acquisition (Bundesrat-Drucksache 630/03, page 53). It would be contrary to this expressly expressed regulatory intention if, for each rent increase, it had to be checked separately and again each year whether the ratio of the market values of the building and land to each other and thus the limit of 15% has changed.

bb) The modernization expenses incurred in the gross amount of EUR 56,117.29 are to be added to the acquisition costs of the building as acquisition-related production costs within the meaning of Section 6 para. 1 no. 1 letter a EStG. In detail:

The expenses incurred in 2012 for the company S. in the total amount of EUR 393.36, the expenses incurred in 2013 for L. (EUR 111.05) and the expenses incurred in 2014 for the maintenance work of the companies D. and Y. in the amount of EUR 458.85 were rightly recognized by the defendant as immediately deductible income-related expenses.

In addition, however, the expenses incurred in 2014 for purchases from Z. in the amount of EUR 13.97 must also be recognized as immediately deductible income-related expenses. The previously recognized immediately deductible income-related expenses are to be increased accordingly.

The other maintenance expenses incurred in the years in dispute 2012 (EUR 50,297.00 gross) and 2014 (EUR 5,820.29 gross) are expenses that increase the AfA assessment basis as acquisition-related production costs in accordance with Section 6 (1) no. 1 letter a EStG:

i) The expenses incurred in 2012 for the installation of the heat cost allocators by the company S. (EUR 108.17 gross) are neither expenses for extensions within the meaning of Section 255 (2) sentence 1 HGB nor expenses for maintenance work that are normally incurred annually. The expenses are to be included in the calculation of the 15% limit.

ii) The expenses for the repair of the burst pipe on 13.07. and 16.07.2012 by the company K. in the gross amount of EUR 207.65 (EUR 1,707.65 gross less insurance benefit of EUR 1,500) are also to be included in the calculation of the 15% limit.

Contrary to the plaintiffs' blanket assertion, there is no evidence in the present case that the burst pipe was actually caused by external events occurring exclusively after the purchase (e.g. caused by a third party). The plaintiffs' submission in this regard is ultimately limited to the mere assertion, made for the first time in the current legal proceedings in a letter dated 3 January 2019, that it is not a matter of cosmetic repairs or maintenance expenses, but of damage that occurred during the renovation of the 2nd floor apartment and was caused by a tradesperson. No further substantiated submission was made in this regard. Why this allegedly externally caused damage was nevertheless largely paid for by the plaintiffs' own insurance is not clear to the Senate based on the files. Instead, there is much to suggest that in this case only the typical life risk, which was already present at the time of purchase, that assets can become defective even without special events - in particular due to age-related wear and tear - actually materialized. Even if the pipes may still have been functional when the house was purchased, this does not change the fact that their service life was finite from the outset. If second-hand assets become non-functional after purchase, this ultimately only realizes a risk that was already present at the time of purchase. Accordingly, the costs of repair measures to eliminate hidden defects that already existed at the time of acquisition of the building are to be included in the acquisition-related production costs within the meaning of Section 6 para. 1 no. 1a EStG. of Section 6 para. 1 no. 1a sentence 1 EStG; when distinguishing immediately deductible maintenance expenses from production costs, the subjective expectations of the purchaser regarding the condition of the building are also irrelevant (BFH ruling of 09.05.2017 IX R 6/16, BStBl II 2018, 9). Nothing else applies to the costs of eliminating defects and faults that were present when the building was acquired but only appear after the acquisition; such expenses are also by their nature hidden defects and are included in the amount limit of the near-acquisition production costs within the meaning of Section 6 para. 1 no. 1a sentence 1 EStG (BFH ruling of 09.05.2017 IX R 6/16, BStBl II 2018, 9).

iii) Also to be included in the calculation of the 15 % limit are the expenses claimed as income-related expenses for the 2012 year of dispute for the work carried out by company X. - including painting and tiling work - in the gross amount of EUR 15,000 and EUR 18,500.

Nothing else results from the fact that - as the plaintiffs simply claim - company X. overcharged a total of EUR 4,760. No further submission was made in this regard. However, this is also irrelevant, as the plaintiffs paid the invoice amount in full to company X. and did not receive any repayment. Whether a service rendered is worth the amount invoiced and actually paid for it is just as little a criterion for the question of the existence of maintenance expenses as the question of whether the services rendered and paid for were invoiced correctly. Rather, the decisive factor here is that the claimants actually paid the entire invoice amount for the craftsman services invoiced and that they incurred expenses for these craftsman services. In contrast, it would be contrary to the meaning and (simplification) purpose of Section 6 para. 1 no. 1a EStG to examine the recoverability and correctness under civil law of the amount of individual invoice items or payments as part of the examination of Section 6 para. 1 no. 1a EStG.

Even to the extent that the plaintiffs additionally state that a partial amount of EUR 4,000, contrary to the information on the invoice, is in any case not attributable to the renovation of the 2nd floor apartment, as this amount would normally have been incurred for maintenance expenses, e.g. for painting a hallway, etc., this does not justify a different legal assessment. This is because even such cosmetic repairs such as wallpapering and painting walls, floors, radiators, interior and exterior doors and windows are not usually incurred annually and must be included in the 15% limit (BFH ruling of 14.06.2016 IX R 25/14, BStBl II 2016, 992, para. 16).

iv) The gross expenses of EUR 5,820.29 incurred in the 2014 year of dispute for the elimination of the leak in the oil tank must also be included in the calculation of the 15% limit.

Insofar as the plaintiffs claim for the first time in their letter dated 3 January 2019 in general terms and without any substance that the leak in the oil tank was caused by a tradesman, because otherwise it is not comprehensible how a leak in the oil tank could suddenly occur during normal maintenance and it can therefore be assumed that a tradesman is partly to blame, this is not convincing. No further submission or evidence was provided in this regard. In contrast, the plaintiffs themselves stated in their letter dated November 2, 2017 that it was a "hidden defect" and that they had considered charging the costs to the previous owner, but had refrained from doing so due to the low chances of success.

According to the BFH, which the Senate follows, (hidden) defects occurring after the acquisition are to be included in the amount limit of the acquisition-related production costs within the meaning of Section 6 para. 1 no. 1a sentence 1 EStG (BFH ruling of 09.05.2017 IX R 6/16, BStBl II 2018, 9). Even if the damage did not exist at the time of purchase and was not "created", but only occurred or was caused at a later date without the intervention of a third party, the expenses would still be included in the 15% limit. Such maintenance expenses are also covered by Section 6 para. 1 no. 1a EStG. The standard presumption for the existence of acquisition-related production costs within the meaning of Section 6 para. 1 no. 1a EStG (only) does not apply to expenses for the elimination of damage caused willfully by third parties - which is not the case here (BFH ruling of 09.05.2017 IX R 6/16, BStBl II 2018, 9, para. 17).

v) Section 6 para. 1 no. 1a sentence 2 EStG also does not provide preferential treatment for a lump sum in the amount of maintenance expenses typically incurred annually according to life experience (Düsseldorf Fiscal Court, ruling of 30.08.2016, case no. 10 K 398/15 F, EFG 2016, 1774). Likewise, pursuant to Section 6 (1) no. 1a sentence 2 EStG, a (lump-sum) deduction of income-related expenses in the amount of the "typically incurred maintenance costs" stated by the expert in her expert opinion of 22.03.2023 when determining the market value using the income capitalization approach is not possible.

vi) Insofar as the plaintiffs further object that "the BFH" itself added on 20.10.2017 that the new case law on cosmetic repairs only applies to acquisitions from 01.01.2017, it should first be noted that the letter dated 20.10.2017 is a BMF letter. According to this BMF letter, the previous BFH case law on the treatment of cosmetic repairs in connection with acquisition-related production costs can continue to be applied to situations in which the purchase agreement was concluded before 01.01.2017 (Federal Ministry of Finance, 20.10.2017, IV C 1-S 2171-c/09/10004:006). This is an administrative regulation to which the tax court is not bound (BFH rulings from 16.09.2015 XI R 27/13, BFH/NV 2016, 252; from 13.01.2011 V R 12/08, BStBl II 2012, 61).

vii) The claimants cannot successfully invoke the protection of legitimate expectations (Section 176 AO). § Section 176 para. 1 sentence 1 no. 3 AO does not grant any protection of legitimate expectations if the case law has only changed after the issue of the amending assessment notice issued to the disadvantage of the taxpayer (BFH rulings of 20.12.2000 I R 50/95, BStBl II 2001, 409; of 11.04.2002 V R 26/01, BStBl II 2004, 317; of 06.06.2007 V B 64/06, BFH/NV 2007, 1802). In the present case, the amendment notice for 2012 at issue was issued on 21.04.2016, i.e. before the BFH ruling of 14.06.2016 (IX R 25/14) was issued.

The notices in dispute for 2013 and 2014 dated 21.04.2016 are first-time notices to which Section 176 AO is not applicable. Moreover, these were also issued before the BFH's change in case law.

Finally, the plaintiffs have also not explained and proven that they only carried out the measures implemented in the years 2012 to 2014 in reliance on the previous case law of the BFH on Section 6 para. 1 no. 1a EStG.

cc) According to all of the above, the depreciation assessment basis for the years in dispute 2012 and 2013 is EUR 352,724.00 (EUR 302,427.00 + EUR 50,297.00) and for the year in dispute 2014 a total of EUR 358,544.00 (EUR 302,427.00 + EUR 50,297.00 + EUR 5,820.29).

d) An annual depreciation rate of 2.22% is to be applied to the H.-straße property.

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 is to be deducted for each year that is attributable to one year if these costs are distributed evenly over the total period of use or utilization (depreciation in equal annual amounts, § 7 para.1 sentence 1 EStG); the deduction is based on the normal useful life of the asset (§ 7 para. 1 sentence 2 EStG). Deviating from this, depreciation for a building used to generate income is determined according to the fixed percentages of Section 7 (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 the year of acquisition or production of the asset, the deduction amount for this year is reduced in accordance with sentence 1 by one twelfth for each full month preceding the month of acquisition or production (Section 7 (1) sentence 4 EStG).

According to Section 7 (4) sentence 1 no. 2 letter a EStG, 2% of the acquisition/production costs are to be deducted annually as depreciation for buildings completed after December 31, 1924. If the actual useful life of a building is less than 50 years, the depreciation corresponding to the actual useful life can be applied instead of the deductions according to sentence 1 (Section 7 (4) sentence 2 EStG).

According to Section 11c (1) of the Income Tax Implementation Ordinance (Einkommensteuer-Durchführungsverordnung - EStDV), the useful life within the meaning of Section 7 (4) sentence 2 EStG is 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 the legal circumstances that may limit the useful life of an asset. The starting point is the technical useful life, i.e. the period in which the asset is subject to technical wear and tear. If the economic useful life is shorter than the technical useful life, the taxpayer can also invoke this. Whether the conditions for a shortened useful life within the meaning of Section 7 (4) sentence 2 EStG are met is determined by the circumstances of the individual case (see BFH ruling of 04.03.2008 IX R 16/07, BFH/NV 2008, 1310). The burden of proof lies with the taxpayer, who must demonstrate and, if necessary, prove a shorter actual useful life in the individual case (see BFH ruling of 28.07.2021 IX R 25/19, BFH/NV 2022, 108). The taxpayer can use any method of presentation that appears suitable in the individual case to provide the necessary evidence. For example, an appraisal by a publicly appointed and sworn expert commissioned by a local court can also be used for this purpose (see Münster Fiscal Court, judgment of 27.01.2022, 1 K 1741/18 E, EFG 2022, 580). The submission of a building fabric appraisal is not a prerequisite for the recognition of a shortened actual useful life (BFH ruling of 28.07.2021 IX R 25/19, BFH/NV 2022, 108). Since the taxpayer's estimate cannot require certainty about the shorter actual useful life, but at best the greatest possible probability, it can therefore only be rejected if it is clearly outside the reasonable scope of the estimate (see BFH ruling of 28.09.1971 VIII R 73/68, BStBl II 1972, 176).

In this respect, the Senate agrees with the plaintiffs' submission that the remaining useful life of the H.-straße property was still 45 years in the year of acquisition 2012, according to the convincing statements of the expert N. commissioned by the court in her expert opinion of 22.03.2023. This results in straight-line depreciation of 2.22 % per year in accordance with Section 7 (4) sentence 2 EStG.

e) Based on all of the above, the following calculation of the depreciation to be applied for the 2012 year of dispute results:

The straight-line depreciation (2.22%) to be recognized for the 2013 year in dispute is EUR 7,830.

The following calculation of the depreciation to be applied results for the 2014 year in dispute:

The depreciation taken into account to date for 2012 is to be increased accordingly by EUR 424, the depreciation taken into account to date for 2013 by EUR 848 and the depreciation taken into account to date for 2014 by EUR 862.

f) As explained above, the expenses incurred by Z. in 2014 in the amount of EUR 13.97 are also to be recognized as further immediately deductible income-related expenses pursuant to Section 9 (1) sentence 1 EStG.

II. the calculation of the taxes to be assessed is assigned to the defendant (section 100 (2) sentence 2 FGO).

III. the decision on costs follows from § 136 para. 1 sentences 1, 3 FGO. The plaintiffs have to bear the costs in full despite partial victory, as the defendant has lost "only to a small extent" within the meaning of Section 136 (1) sentence 3 FGO.

IV. There are no grounds for allowing the appeal (Section 115 (2) FGO). It has already been clarified by the highest court that for the purposes of purchase price allocation for rented apartment buildings, a market value assessment using the asset value method is generally appropriate (BFH ruling of 29.10.2019, IX R 39/17, BFH/NV 2020). The question of whether the application of the asset value method leads to an inappropriate result in the case in dispute and whether the specific maintenance expenses paid by the plaintiffs in the years in dispute are to be included in the 15% limit pursuant to Section 6 para. 1 no. 1a sentences 1, 2 EStG is a question of the individual case, which is the responsibility of the tax court as the court of fact.

https://nrwe.justiz.nrw.de/fgs/duesseldorf/j2023/2_K_2449_18_E_Urteil_20230816.html