Deductible renovation costs
The costs of renovations in let properties can be deducted from rental income. Deductions depend on whether the renovation involves annual repairs or modernisation.
- What is meant by annual repairs and modernisation?
- How to deduct annual repair costs?
- How to deduct modernisation costs?
Other things to take into account:
- Renovations in let properties
- Deductible DIY renovation expenses
- Deductions from rental income from timeshares
- Landlords and tax credit for domestic services
What is meant by annual repairs and modernisation?
Annual repairs involve restoring a flat or a building to its original condition. The extent of repairs depends on the latest standards.
Annual repairs include, among others,
- painting and decorating
- replacing stoves, refrigerators or other household appliances
- replacing fixtures, such as kitchen cabinets and bathroom suites
- replacing doors and windows.
Modernisation involves extending or altering a flat or a building or carrying out other similar works.
Modernisation differs from annual repairs in the sense that modernisation increases the standard or size of a flat or a building and therefore improves it.
The following are examples of modernisations:
- Converting an unheated storage space into a sauna
- Glazing balconies
- Improving foundations and load-bearing structures
- Improving heating and ventilation systems
- Installing and improving plumbing and drains
- Installing and improving electrical systems
How to deduct annual repair costs?
Annual repair costs can be deducted from the rental income of the year during which they were paid.
Deducting annual repair costs:
- Landlords need to deduct costs incurred from renovating their let properties during the year they were paid.
- Costs incurred from renovations commissioned by housing co-operatives can only be deducted if the capital charges are recorded as revenue in the housing co-operative’s books.
How to deduct modernisation costs?
Modernisation costs can be deducted gradually on the basis of annual depreciation or when the property is sold.
Deducting modernisation costs:
Costs incurred by landlords from renovating their let properties themselves can be deducted on the basis of
Costs incurred from renovations commissioned by housing co-operatives can only be deducted if the charges are recorded as revenue in the housing co-operative’s books.
Deducting flat modernisation costs on the basis of straight-line depreciation
Landlords who commission and pay for modernisation works themselves can deduct the costs over a period of 10 years. The deductions must be based on straight-line depreciation, i.e. split evenly between the 10 years. In other words, one tenth of the costs is deducted each year.
If a landlord sells a flat or stops letting it before the entire amount has been deducted, the remaining part is added to the purchase price of the flat when calculating capital gains from the sale.
If no deductions have been made, the entire amount of modernisation costs is added to the purchase price and taken into account in capital gains or losses when the flat is ultimately sold.
Claim deductions online or on paper:
- Tax Return in MyTax
- You can also claim the deductions with Form 7H in the section “Other expenses for the production of the rental income”.
Example: Lauri owns a flat that has been let out for several years. Lauri decides to renovate the flat. The kitchen is extended by taking down a wall between the kitchen and the living room. New cabinets and appliances are installed in the extended kitchen. A small walk-in wardrobe is built in the bedroom. The walls and ceiling of the flat are also painted.
The total cost of the renovation is EUR 8,000. Lauri paid the costs in 2023. According to Lauri, half of the costs (EUR 4,000) were for modernisation: extending the kitchen and building the walk-in wardrobe. EUR 4,000 was spent on annual repairs.
Lauri can deduct the annual repair costs (EUR 4,000) from his 2023 rental income. In addition, Lauri can deduct the modernisation costs on the basis of straight-line depreciation across a period of 10 years. In other words, Lauri can deduct EUR 4,000 / 10 years = EUR 400 from his 2023 rental income. The remaining EUR 3,600 will be deducted over the following nine years, EUR 400 each year.
Adding modernisation costs to buyer’s expenses and making deductions based on depreciation
Modernisation costs are added to the purchase price of the building. They can be deducted from rental income as part of buyer’s expenses on the basis of annual depreciation.
Example: A house has been let out for a whole year. Buyer’s expenses amount to EUR 90,000 after depreciation deducted the previous year. EUR 10,000 is spent on modernising the building. The modernisation costs are added to the remaining purchase price, and the tax year’s depreciation is calculated on the basis of EUR 100,000 (EUR 90,000 + EUR 10,000 = EUR 100,000). EUR 100,000 x 4% = EUR 4,000 can be deducted from rental income generated during the tax year. Buyer’s expenses that will be carried over to the following year amount to EUR 96,000.
When a property is sold and capital gains or losses calculated, the portion of buyer’s expenses that has already been deducted from rental income on the basis of depreciation cannot be deducted from the sale price. If no deductions have been made, the entire amount of modernisation costs is added to the purchase price.
Depreciation cannot be deducted from the purchase price of land.
See a list of other rental flat costs that can be deducted from rental income.
Other things to take into account:
Only renovation costs that are incurred while a property is let can be deducted.
Costs incurred from renovations carried out immediately after a flat or a house is purchased and before it is let out cannot be deducted from rental income.
Such renovation costs are added to buyer's expenses instead:
- Costs incurred from renovating flats are always added to buyer’s expenses and taken into account in capital gains or losses when the flat is ultimately sold. Whether the renovations involve annual repairs or modernisation is irrelevant.
- Costs incurred from renovating houses are always added to buyer’s expenses and can be deducted as part of the purchase price based on annual depreciation.
Landlords who renovate their rental flats or buildings themselves cannot make deductions for their own labour.
Deductions can, however, be made for
- the cost of materials
- wages paid to others
- the landlord’s travel expenses (EUR 0.30/km in 2023) from journeys to the renovated flat or property.
If you rent out a timeshare (that you have bought for your private use), the only expenses that can be deducted from the rental income are costs that are
- incurred during the weeks when the property is rented out
- directly related to renting out the property.
Whether the timeshare is rented out directly or through a letting agent is irrelevant.
Example:
Henri rents out his timeshare in Levi. He commissions a letting agent to deal with the rental. According to the contract, the property can be rented out during weeks 2–14 and weeks 16–52. During all the other weeks of the year, Henri can use the property. In addition, Henri can also use the property during weeks 2–14 and weeks 16–52 if the letting agent fails to find a tenant.
The property was rented out during weeks 12–14, 16–18 and 51–52. Henri’s rental income amounts to €400 × 8 weeks = €3,200. Henri used the property himself during weeks 1 and 15. The rest of the time the property was empty.
Henri’s overheads are €150/month for maintenance expenses (charges, etc.), in addition to which he has incurred costs that are directly related to renting out the property, namely €50 for brochures and maps for tenants and the letting agent’s annual fee of €200.
Henri can only deduct costs that were incurred while the property was rented out. The property was rented out for a total of eight weeks. Henri can therefore make the following deductions:
- 15% of overheads (8 weeks / 52 weeks = 15%)
- 100% of costs directly related to renting out the property
The property is deemed to have been in personal use for 44 weeks (52 weeks – 8 weeks).
Henri can therefore deduct from his rental income
- overheads in the amount of 15% × (12 months × €150) = €270
- costs directly related to renting out the property in the amount of €200 + €50 = €250
The total deduction from Henri’s rental income therefore amounts to €520. The rest of the expenses are considered to relate to personal use and cannot be deducted. Henri’s taxable rental income comes to €3,200 – €520 = €2,680.
Only the resident of a property can claim a tax credit for domestic services. In other words, landlords cannot claim a tax credit for domestic services on the basis of renovation costs incurred from their let properties.
Tenants who commission renovations can deduct the costs from their taxable income if the other conditions for deductibility are satisfied.