Proposal Required for New Directive on Commission's Initiative
In a recent development, the Federal Fiscal Court has provided clarity on the tax treatment of payments from special levies (Sonderumlagen) in Germany. The court has emphasised that these payments are only tax-deductible when the money is actually used for specific measures.
When it comes to payments into a condominium reserve fund, these are typically considered contributions to long-term maintenance and repairs of the property. These payments are not treated as taxable income for the condominium association, nor deductible for individual owners because they are considered capital reserves for future expenses rather than current costs.
On the other hand, special levies are usually raised for extraordinary repairs or investments that exceed the regular reserve fund’s coverage. For individual condominium owners in Germany, special levies are generally not deductible as current expenses on income tax returns since they are considered capital expenditure related to the property. However, they may potentially be added to the cost basis of the property for capital gains tax purposes when the property is sold.
For the condominium association itself, both reserve fund payments and special levies are typically not classified as taxable income because they serve maintenance and upkeep functions rather than generating profit.
It's important to note that payments from the special levy must be depreciated over several years, unlike reserve fund payments which are not tax-deductible in the year they are made. A separate accounting for costs paid from the special levy should be maintained, from which the details can be seen. Property owners can see the payments from the reserve fund listed in a separate accounting section at the end of their annual total settlement.
Interestingly, even production costs paid from the special levy can be claimed by property owners of a rented apartment. For instance, the cost of installing an elevator can be considered a production cost from a tax perspective and may be claimed if the money from the special levy is actually used for paying these costs.
Jana Bauer, the managing director of the Federal Association of Tax Assistance Associations (BVL), has confirmed that payments into the reserve fund are not tax-deductible in the year they are made. It's worth mentioning that condominium owners are required to make monthly payments into the reserve fund for maintenance.
If a condominium owner rents out an apartment, they can claim maintenance costs as advertising expenses in the income from letting and leasing. However, payments from the special levy cannot be claimed directly and in full as advertising expenses.
In summary, the main difference between the reserve fund and the special levy lies in their purpose and the way they can be claimed as tax-deductible expenses. For precise tax treatment, including potential differences if the property is rented out versus owner-occupied, consulting a German tax advisor or reviewing the German Income Tax Act (Einkommensteuergesetz) and applicable VAT regulations is advisable.
A community policy could be devised to address the tax treatment of reserve fund payments and special levies, as they have different implications for property owners. For instance, vocational training programs could be initiated to equip property owners with the necessary knowledge about tax-deductible expenses associated with these funds.
In the realm of real-estate investments, understanding the tax implications of special levies can be crucial. This knowledge, when combined with strategic financial planning and investing wisely, could potentially maximize returns on such investments.
