Consideration of a maintenance reserve
Consideration of a maintenance reserve
As a rule, owners of apartments make monthly housing benefit payments as members of an apartment owners’ association. According to the German “Act on the Ownership of Apartments and the Permanent Residential Right” (Wohnungseigentumsgesetz, WEG), they must set up an appropriate maintenance reserve - known as a “maintenance provision” before the amendment to the law by the German Ownership of Apartments and the Permanent Residential Right Modernization Act (Wohnungseigentumsmodernisierungsgesetz) of October 16, 2020 - for the maintenance of the property. Unlike advances for operating and administrative costs, payments into the maintenance reserve cannot be considered as income-related expenses at the time of payment under current legislation, but only when the reserves are actually spent on maintaining the common property or on other measures.
Practically speaking, this means that housing benefit payments must be reduced by the amounts for the maintenance reserve and that the rental income is only reduced when actual expenditure is incurred for maintenance measures. This applies regardless of the fact that the contributions to the maintenance reserve have been paid by the apartment owner and are no longer freely available to him. The same legal principles also apply in the case of owner-occupied apartments for the consideration of a tax reduction for household-related expenses pursuant to § 35a of the German Income Tax Act (EStG). Furthermore, the expenses from the maintenance reserve are only deductible as a deduction for wear and tear over the usual useful life if they are major acquisitions or measures that lead to production costs. The allocated reserve amounts that have not yet been used also play a role in the event of the sale of the property – the transferred portion of the maintenance reserve passes to the purchaser and therefore cannot be deducted by the seller.
In the legal dispute, a landlord took the view that, in the case of rented apartments, the allocation to the maintenance reserve must be considered as immediately deductible income-related expenses – i.e. according to the inflow and outflow principle pursuant to § 11 EStG at the time of payment. His reasoning for taking this approach was that the association of apartment owners acquired legal capacity with the aforementioned reform of the WEG on December 1, 2020. So far, this legal interpretation of the “new” WEG is not yet common practice in tax administration. The German Federal Fiscal Court (BFH) agreed in its ruling from January 14, 2025 (case reference IX R 19/24) with the court of lower instance (Nuremberg Fiscal Court, ruling from March 12, 2024,case reference 1 K 866/23), and reject the deduction of income-related expenses for the allocation to the maintenance reserve at the time of the outflow. Therefore, income-related expenses for rental and lease income will continue to be incurred only when funds are withdrawn from the reserve for the purpose of paying maintenance expenses. This view is justified by the fact that the deduction of income-related expenses requires an economic connection between the rental activity and the taxpayer’s expenses. In the opinion of the BFH, this is only the case when the apartment owners’ association spends the accumulated funds for maintenance measures. The legal obligation of an apartment owner to participate in the establishment and maintenance of an appropriate reserve for the maintenance of the residential property is of no fiscal significance in this respect.
Practically speaking, this means that housing benefit payments must be reduced by the amounts for the maintenance reserve and that the rental income is only reduced when actual expenditure is incurred for maintenance measures. This applies regardless of the fact that the contributions to the maintenance reserve have been paid by the apartment owner and are no longer freely available to him. The same legal principles also apply in the case of owner-occupied apartments for the consideration of a tax reduction for household-related expenses pursuant to § 35a of the German Income Tax Act (EStG). Furthermore, the expenses from the maintenance reserve are only deductible as a deduction for wear and tear over the usual useful life if they are major acquisitions or measures that lead to production costs. The allocated reserve amounts that have not yet been used also play a role in the event of the sale of the property – the transferred portion of the maintenance reserve passes to the purchaser and therefore cannot be deducted by the seller.
In the legal dispute, a landlord took the view that, in the case of rented apartments, the allocation to the maintenance reserve must be considered as immediately deductible income-related expenses – i.e. according to the inflow and outflow principle pursuant to § 11 EStG at the time of payment. His reasoning for taking this approach was that the association of apartment owners acquired legal capacity with the aforementioned reform of the WEG on December 1, 2020. So far, this legal interpretation of the “new” WEG is not yet common practice in tax administration. The German Federal Fiscal Court (BFH) agreed in its ruling from January 14, 2025 (case reference IX R 19/24) with the court of lower instance (Nuremberg Fiscal Court, ruling from March 12, 2024,case reference 1 K 866/23), and reject the deduction of income-related expenses for the allocation to the maintenance reserve at the time of the outflow. Therefore, income-related expenses for rental and lease income will continue to be incurred only when funds are withdrawn from the reserve for the purpose of paying maintenance expenses. This view is justified by the fact that the deduction of income-related expenses requires an economic connection between the rental activity and the taxpayer’s expenses. In the opinion of the BFH, this is only the case when the apartment owners’ association spends the accumulated funds for maintenance measures. The legal obligation of an apartment owner to participate in the establishment and maintenance of an appropriate reserve for the maintenance of the residential property is of no fiscal significance in this respect.
Note:
In the view of the BFH, the 2020 reform of the German “Act on the Ownership of Apartments and the Permanent Residential Right”, which granted the apartment owners’ association full legal capacity, does not change this view either.