Since April 2014, the Federal Ministry of Finance has provided the tax administration with a working aid for apportioning the total purchase price for a developed property (purchase price apportionment). In its ruling of 21 July 2020 (Ref.: IX R 26/19), the Federal Fiscal Court has now decided that this assistance may no longer be used in disputes between the taxpayer and the tax office.

Why is the purchase price allocation relevant at all?

Anyone who acquires a property for the purpose of earning an income usually has an interest in dividing the purchase price in such a way that the building accounts for as high a proportion of the purchase price as possible and the land for as low a proportion as possible. This is because depreciation for wear and tear can be claimed on the building portion. In principle, the tax office is obliged to accept the values from the notarial purchase contract as long as there are no significant doubts (BFH, judgement of 10.10.2000, ref.: IX R 86/97). If any doubts arose, the tax office, in its constant practice, referred back to the BMF’s working aid.

What are the facts underlying the current ruling?

In the specific case, the taxpayer plaintiff had purchased a rented condominium in a major city. While the plaintiff assumed a depreciable building share of 82%, the tax authorities arrived at a building share of only 31% via the working aid. The BFH has now countered this disproportion. The BMF’s working aid was not entirely suitable for determining the real market values of land and buildings. This is justified, on the one hand, by the fact that the working aid only uses the simplified asset value method. On the other hand, the location factor, which can lead to massive market value deviations, especially in large cities, is not taken into account.

What is the consequence of the ruling?

First of all, the ruling leads to the inapplicability of the FOM’s working aid in disputed cases. Instead, the tax authorities now have to obtain an expert opinion from an independent sworn expert in cases of doubt.

In any case, it makes sense to base the property purchase contract on comprehensible and plausible values. Finally, the above-quoted ruling from 2000 still applies; the tax office is still required to adopt the purchase price allocation from the notarial purchase contract, provided there are no significant doubts. According to settled case law, this only arises if, for example, there are indications of a fictitious transaction or an abuse of the tax structure.

Therefore, the tax advisor should be consulted on questions of the drafting of real estate purchase contracts in the run-up to the purchase.