Land and soil: Subsequent manufacturing costs or immediate deduction?

Expenses for the rehabilitation of (let) land areas can be immediately deductible expenses or subsequent manufacturing costs of land and soil. The German Federal Fiscal Court (Bundesfinanzhof; BFH) clarified in its decision of August 21, 2026 (case no. IX R 13/25) under which conditions subsequent manufacturing costs arise for land and soil instead of immediately deductible expenses. Although the decided case has particularities, the principles explained therein are relevant in general.

Facts

A married couple acquired a former mining site on which, among other things, a decommissioned supply shaft was located; this shaft remained the property of the seller. Due to a required protection zone around the shaft, the plot was only usable to a limited extent. A later geotechnical expert opinion determined a significantly larger protection zone, so that own or third-party operational use and construction measures on the plot were no longer possible.

The couple therefore had the shaft rehabilitated to restore the usability of the plot to a level comparable to the acquisition time and then to develop and let it. The wife’s share of the property was always held in private assets. The husband had transferred his share, which had initially been held in business assets, into private assets in the year before the rehabilitation.

The couple claimed related expenses as expenses from letting and leasing. Tax administrations, however, classified these as subsequent manufactoring costs of the land and soil and therefore denied the deduction as expenses. The fiscal court confirmed this. 

Decision of the BFH

The BFH overturned the decision of the fiscal court and remanded the case.

Expenses incurred after the acquisition of land and soil can (also) result in subsequent manufacturing costs. The BFH has in earlier decisions confirmed the existence of subsequent manufacturing costs when the expenses were caused by using the land and soil itself and not by erecting a building. A further requirement is that the land and soil are thereby significantly improved beyond their original condition. If, by contrast, the expenses merely serve to preserve the land and soil, they are no manufacturing costs. Rather, they are immediately deductible.

A significant improvement exists when the measures - for example for land reclamation, land conversion to arable land or development - go beyond usual restoration and substantially increase the usability of the land and soil. The benchmark for a significant improvement is the “original condition”. In principle, the utility value after completion of the measures is to be compared with the utility value at the time of acquisition.

The wife held her land share in private assets all the time. Hence, she had immediately deductible expenses. The rehabilitation had merely restored the usability that existed at the time of acquisition. 

For the husband’s land share, the BFH left the classification open: if, for example, he had taken a partial impairment write-down during the period of inclusion in business assets because of worse substance or usability, the condition after write-down is to be compared with the condition after rehabilitation. Subsequent manufacturing costs may result from this. Without such a change, it depends on the condition at the time of acquisition, and his expenses are immediately deductible. Now, the fiscal court shall find out. The transfer into private assets does not, however, establish a new comparison date. 

Notice

It remains open how subsequent restoration costs of land and soil are generally to be distinguished from subsequent acquisition costs within the meaning of Section 255 (1) sentence 2 of the German Commercial Code (Handelsgesetzbuch; HGB). These can, for example, arise from expenses to remove an encumbrance on the property. The current judgment also does not clarify the general distinction from expenses that bring the land and soil into an operationally ready condition (e.g., contributions paid to a municipality for carried-out development measures). Such expenses are to be allocated to acquisition costs and not to manufacturing costs pursuant to Section 255 (1) sentence 1 HGB. This distinction is sometimes decisive for accounting measurement: for manufacturing costs, the HGB expressly provides, depending on the cost type, lower and upper measurement limits. For acquisition costs, by contrast, it does not distinguish by cost types.