The total purchase price paid for the acquisition of a real estate property must be divided into a building and a land share to determine the basis for depreciation. In practice, this is particularly prone to dispute between the taxpayer and the tax authorities. This is because the taxpayer regularly requests a high depreciation volume concerning the building. Proof by means of expert opinions using the most suitable valuation method according to the German Real Estate Valuation Ordinance - comparative value method, capitalised earnings value method, asset value method - is usually unavoidable. The tax authorities, on the other hand, determine the valuation method according to the type of building in question. In its ruling of September 20, 2022 (file no. IX R 12/21), the German Federal Fiscal Court therefore answers the important question of when which valuation method is to be applied.
In the dispute, a GbR managing assets acquired a freehold flat in 2013 for a purchase price of EUR 158,500. From this, the GbR determined a building share of around 84 % and submitted a corresponding expert opinion using the capitalised earnings value method. In the opinion of the tax office, however, the asset value method was to be applied; it determined a total asset value of EUR 52,086 and a building share of 51 %. In the first instance proceedings at the tax court, a further expert opinion confirmed the GbR’s view. However, the tax court also demanded a supplementary valuation according to the asset value method. Although this led to improper results in the opinion of the expert, the tax court considered a purchase price division using the asset value method to be appropriate. The GbR objected to this in the appeal proceedings.
In its ruling, the German Federal Fiscal Court first confirms the fundamental applicability of the valuation methods according to the German Real Estate Valuation Ordinance for the purchase price division. According to the wording of the law, however, contrary to the opinions of the tax authorities and the tax court of first instance, there is neither a generalisation nor a typifying priority of certain valuation methods for certain types of buildings. Which of the three basically equivalent valuation methods is to be applied in concrete terms is rather to be decided according to the actual circumstances of the respective individual case.
The comparative value method is suitable for determining land values and - if a sufficient database is available - also for developed land.
The application of the asset value method should be considered in the case of “special properties” (such as listed properties) or if comparable properties are regularly acquired by buyers whose alternative is to build a new property, which is most likely to be the case with owner-occupied or rented (residential) properties in private assets. In the case of these types of buildings, it can be assumed that, in addition to income considerations and the safe investment of capital, the prospect of a long-term tax-free increase in the value of the property is also decisive for the acquisition.
The capitalised earnings value method should be used if comparable properties are usually acquired with the intention of generating income and/or increasing the value of the capital invested, as is the case in particular with business properties. However, this can also apply to rented residential buildings held as private assets, if in the individual case - for example with a view to the state of renovation or the sought-after inner-city location - it is a matter of investment objects and the asset value method does not appear to be equally suitable for determining the value. An indication can be, in particular, a considerable deviation between the value determined by the asset value method and the agreed and actually paid purchase price.
The German Federal Fiscal Court transfers these principles to the freehold flat in dispute. Against the background of the dynamic development of the real estate market, it points out that even purely residential properties can be regarded as investment objects; the acquisition of owner-occupied or rented freehold flats is therefore regularly also based on income considerations, which justifies the application of the capitalised earnings value method. In this context, it also had to be taken into account that the freehold flat in dispute was a holiday flat located in a popular holiday region and intended exclusively for letting to third parties.
Furthermore, the values determined by the tax office in the present case according to the asset value method did not correspond in the slightest to the real value ratios; therefore, they cannot be used as a basis for taxation. The total real value was EUR 52,086, whereas the actual acquisition costs borne by the GbR amounted to EUR 158,500. It is therefore clear that the acquisition process on the part of the GbR was not ostensibly based on considerations of creating assets of stable value and/or achieving non-taxable increases in value. Rather, the income achievable from the property was the determining factor for the purchase decision.
The German Federal Fiscal Court remanded the case to the tax court, which must now, in the second instance, divide the total purchase price appropriately using the criteria established by the German Federal Fiscal Court and applying them to the specific individual case.
Notices: With its current decision, the German Federal Fiscal Court makes it easier to choose the valuation method for the division of the purchase price to be used for the purpose of determining the depreciation assessment basis. In practice, it should also always be checked whether the total value determined by the expert or the tax office corresponds to the total purchase price at all. If this is not the case - as in the dispute - the selected valuation method may not be appropriate.