BDO Clarifies New Rules on Proving Shorter Depreciation Periods for Buildings

BDO AG Wirtschaftsprüfungsgesellschaft, a German auditing and tax advisory firm, has commented on new guidelines issued by the German Federal Ministry of Finance (BMF) regarding the possibility of using shorter depreciation periods for buildings in tax assessments. The new directives, published on February 22, 2023, aim to clarify how taxpayers can substantiate a shorter actual useful life for buildings than the typically assumed periods.

Traditionally, depreciation periods for buildings in Germany are based on fixed percentages, resulting in typical useful lives of 33 to 50 years, depending on the building's usage and completion date. If the actual useful life is shorter, such as with an acquired existing property, taxpayers can claim depreciation based on this shorter period. Following a ruling by the Bundesfinanzhof (BFH), Germany's highest tax court, in July 2021, taxpayers have been able to use various methods to prove a shorter useful life, leading to an increase in such claims.

The BMF's new letter, however, imposes stricter requirements on how this shorter useful life must be substantiated. Taxpayers must first demonstrate that the building is objectively technically or economically obsolete before the end of the typical depreciation period. Subsequently, the shorter useful life must be determined prognostically with the highest possible probability, considering all relevant factors. BDO notes that unforeseeable events like fire damage or floods are generally not considered valid grounds due to their unpredictable nature.

To justify a shorter technical useful life, it is not sufficient that individual, non-structural parts of the building have been renovated or replaced. It is required that the building as a whole has deteriorated, particularly due to technical wear of its load-bearing components such as the roof structure, interior and exterior walls, floor slabs, and foundation. Nor is an intention to demolish or sell the building sufficient to establish a shorter useful life. A shorter period can only be assumed if it is certain that the building cannot continue to be used for its current purpose, for example, due to a concrete demolition obligation.

The proof of a shorter actual useful life must be provided through a report by a publicly appointed and sworn building expert or a similarly certified appraiser. The report's purpose must explicitly be to substantiate a shorter actual useful life. It should detail the building's condition, justify why no economically viable subsequent use is likely after the claimed (shorter) useful life, and state that no residual value remains. BDO points out that tax authorities do not consider a market value appraisal based on the ImmoWertV (Real Estate Valuation Ordinance) sufficient for tax purposes, although some tax courts have accepted such reports.