The 15% renovation rule: when repairs become capitalised costs

If you renovate a German rental property within three years of buying it, and the repair and modernisation costs exceed 15 per cent of the building's acquisition cost, net of VAT, those costs are no longer deducted from rental income when paid. All of them, not just the excess, are added to the building's cost and depreciated with it, usually at 2 per cent a year (§ 6(1) no. 1a EStG, applied to rental income by § 9(5) EStG). German tax law calls them anschaffungsnahe Herstellungskosten (acquisition-related production costs). Cross the line in year two, and the year-one assessment is corrected too.

This guide applies the 15 percent renovation rule for German rental property to renovation within three years of purchase, with a dated invoice ledger. For the wider picture, see rental property tax benefits in Germany.

The rule covers work carried out within three years of acquiring the building. The Federal Finance Ministry (BMF) counts the period to the day from the transfer of economic ownership, when possession, risk, benefits and burdens pass to you (Übergang von Nutzen und Lasten), not from the notarised contract (BMF letter of 26 January 2026, para. 62). The letter applies in all open cases and replaces the 2003 and 2017 guidance.

What matters is when the work is done. Work carried out inside the window counts even if it is billed or paid later; for a job still running at the deadline, only the part performed by then counts (BMF, para. 63).

The comparison figure is the building's acquisition cost: its share of the price plus its share of purchase costs such as transfer tax, notary and agent. Land is excluded, and so are financing costs such as the notary fees for the bank's land charge (Grundschuld). It is the figure your depreciation starts from; see how to build an AfA schedule.

For the test, renovation invoices count net of VAT. Residential letting is VAT-exempt (§ 4 no. 12 UStG), so a private landlord normally cannot reclaim the VAT, and the gross amount is what is deducted or capitalised (§ 9b(1) EStG).

The statute covers repair and modernisation work (Instandsetzung und Modernisierung). The Federal Fiscal Court (BFH) includes all building work in a post-purchase renovation, even cosmetic repairs (Schönheitsreparaturen) such as painting and wallpapering (BFH IX R 22/15) and costs of making the building fit for use (BFH IX R 15/15). Also:

• Hidden defects present at purchase count (BMF, para. 57).
• Damage arising after purchase through a third party's fault, such as a tenant's, or by chance, such as a storm, does not count (BFH IX R 6/16; BMF, para. 61).
• Reimbursed costs count only net of the reimbursement (BFH IX R 25/14).
• Paying a tenant to leave early so you can renovate is not building work and stays outside (BMF, para. 56).

The statute excludes two kinds of cost:

• Expansion (Erweiterung) within § 255(2) sentence 1 HGB: more usable area, or new elements that extend use, such as a balcony, an awning or an alarm system. These are capitalised at any size anyway (BMF, paras. 31 to 37).
• Maintenance that normally recurs every year, such as servicing heating systems, clearing blocked pipes or meter reading (BMF, para. 60). It stays deductible.

A replacement fitted kitchen sits outside the building calculation altogether: it is a separate asset depreciated over ten years (BFH IX R 14/15).

All qualifying net costs within the window are added together across tax years, not tested year by year or job by job. For an apartment, the base is your unit's acquisition cost.

Works by the owners' association (WEG) are less settled. The Hessian Finance Court held in 2024 that a condominium owner's share of work on the common property (Gemeinschaftseigentum) counts towards the threshold alongside work inside the unit (FG Hessen, 18 June 2024, 4 K 1736/19, as reported by PKF). It was reported as appealed, and the BMF letter is silent. Until it is settled, plan as if your share of a roof, façade or window project in the three years counts.

Illustrative example. Fictional figures. Apartment A: a 65 m² Leipzig flat in a building completed in 1996. Purchase price €240,000; purchase costs excluding the Grundschuld fees €25,368; building share 75 per cent, so the building's acquisition cost is €199,026 and the threshold is €29,853.90 net. Contract notarised 15 January 2026; benefits and burdens pass on 1 April 2026, so the window runs to 31 March 2029. The tenant leaves at the end of March 2027 and the flat is refurbished before re-letting. All work is inside the unit, done on the invoice date and paid that month; no WEG works fall in the window. VAT 19 per cent, not reclaimable. The 2026 return is assessed in June 2027 with the first two invoices deducted. Marginal tax rate 42 per cent; solidarity surcharge and church tax ignored.

After the bathroom, €2,153.90 of headroom remained. The doors took the total €1,046.10 over the line.

• Everything is capitalised, not just the excess. All €32,300 net, €38,437 gross, joins the building's cost. Only the drain clearance stays deductible.
• Earlier assessments are corrected. Crossing the line is a retroactive event, so the 2026 assessment that allowed €2,261 of repairs is amended (§ 175(1) sentence 1 no. 2 AO; BMF, para. 68). The same applies in reverse if a reimbursement later takes the total back under.
• The costs are depreciated with the building. Each year's costs are added to the depreciation base from the start of that year (BMF, para. 68), at the building's rate: 2 per cent for a building completed between 1925 and 2022 (§ 7(4) EStG). In 2026, the purchase year, depreciation covers nine months (§ 7(1) sentence 4 EStG).

Depreciation base: €201,287 in 2026 (nine months), €235,797 in 2027 and €237,463 from 2028, against €199,026 without the works.

The 2026 correction removes €2,227.08 of deductions: about €935 of extra tax at 42 per cent, due once the amended assessment arrives. Across 2026 to 2028, €36,898.92 of deductions, about €15,498 of tax relief, moves into the future and returns at about €323 a year over roughly 48 more years. Neither column is cash: the owner paid €38,437 either way, and a deduction reduces taxable income; it is not a refund.

The doors were not urgent. Had they waited until April 2029, the total would have stopped at €29,100, €753.90 under the threshold, and €34,629 would have been deductible when paid, subject to the points below. Reasonable for a cosmetic upgrade; not for the fuse box if an electrician called it unsafe.

Staying under the threshold removes this rule, not the others. Costs can still be capitalised:

• Expansions, at any size (BMF, para. 33).
• Making an unusable property usable, such as repairing dead heating in a vacant flat, gives acquisition costs (BMF, paras. 7 and 8). A flat let from the day you acquire it normally counts as usable (para. 5).
• Raising the standard in at least three of four core areas (heating, sanitary, electrics, windows) gives acquisition costs (para. 19). Within the three years, the BMF does not examine this while the 15 per cent is not exceeded, except where individual flats in a multi-unit building are upgraded or the work may be the start of a staged renovation (Sanierung in Raten) (para. 77).

Large maintenance costs that are deductible can be spread over two to five years on a mainly residential building (§ 82b EStDV). Capitalised costs cannot.

The rule rewards planning, not postponement. Before you sign, estimate what the flat and the building will need in the first three years. Previous invoices and owners' meeting minutes tell you more than the listing. Alpha Minoris's Buyer's Agent service collects these documents before purchase in Berlin, Dresden or Leipzig, including WEG minutes on planned works and the seller's repair invoices; you need not live in the city. It does not inspect the building or classify costs for tax: take the papers to a surveyor and your tax adviser (Steuerberater).

After purchase, tax timing is no reason to defer a necessary repair. You must keep the flat fit for its agreed use (§ 535(1) BGB), and while a defect impairs that use, the rent is reduced by law (§ 536(1) BGB). The failed water heater is replaced in June, whatever the running total. See who handles repairs in a German rental apartment.

Keep a running ledger of net amounts with the dates the work was done. If you live elsewhere, Vermieter-Autopilot can coordinate agreed repairs after handover in Berlin, Dresden or Leipzig, from quotes to contractor access, within spending approvals agreed in writing, and keep the invoices on file. Their tax treatment stays with you and your Steuerberater.

Before you buy, list the work the flat and the building are likely to need in the first three years, and take that estimate to your Steuerberater. Discuss your first rental property with Alpha Minoris.