The BMF letter dated January 26, 2026, on the distinction between maintenance expenses, production costs, and acquisition-related production costs – consolidation and practical consequences

In a letter dated January 26, 2026, the Federal Ministry of Finance (BMF) completely repealed the administrative instructions from 2003 and 2017 on the tax treatment of repair and modernization measures on buildings and replaced them with a new, comprehensive set of rules. The letter is to be applied in all open cases and is therefore of immediate relevance to a large number of ongoing assessment and audit cases.
The scope, structure, and level of detail of the letter already indicate that the BMF is seeking a fundamental reorganization of the administrative interpretation. The aim is not so much a material change in the legal situation as a standardization and typification of the Federal Fiscal Court's case law, which has been heavily case-specific to date.

1. Regulatory approach and fundamental dogmatic decision

The letter follows a consistently systematic approach. The starting point is the observation that expenses for repair and modernization measures are generally immediately deductible as maintenance expenses, but under certain conditions must be allocated to acquisition or production costs and can therefore only be taken into account by way of depreciation.

This fundamental decision is not new. What is new, however, is the stringent structuring of the assessment into clearly defined categories:

• acquisition costs,

• production costs,

• acquisition-related production costs, and

• maintenance expenses.

The BMF has deliberately dispensed with open-ended assessment formulas and replaced them with typical characteristics that are intended to enable uniform application by the administration. This inevitably leads to a reduction in evaluative case-by-case assessments, but increases the predictability of tax treatment.

2. Acquisition costs and the concept of operational readiness

In the area of acquisition costs, the letter specifies the concept of a building's operational readiness in a previously unknown level of detail. A two-stage test consisting of objective and subjective functionality is now decisive.

Objective functionality is linked to the technical usability of the building. If parts of the building that are essential for its intended use are missing or unusable, the building is objectively not functional. Expenses that are necessary to establish this usability for the first time result in acquisition costs. In contrast, age-related signs of wear and tear or repairable wear and tear defects do not exclude operational readiness.

The subjective functionality, which has now been clearly defined, is of considerable practical importance. This is based on the specific purpose of the purchaser and not on an abstract market perception. The BMF expressly clarifies that the intended purpose includes not only the type of use (e.g., residential or commercial), but also the decision on the desired standard of a residential building. Expenses that are necessary to achieve this standard for the first time may therefore constitute acquisition costs.

Dogmatically, this means a consistent continuation of BFH case law, but at the same time an expansion of the scope of application of acquisition costs, as the subjective quality expectations of the purchaser are becoming more prominent than before.

3. The standardized standard concept for residential buildings

The core content of the letter is the newly introduced standard concept for residential buildings, which is being anchored in administrative opinion for the first time in a binding manner. The BMF distinguishes between three standard levels: very simple, medium, and very sophisticated standards.

The standard of a residential building is determined exclusively on the basis of four key features:

• heating installation,

• plumbing installation,

• electrical installation, and

• windows.

This exhaustive list is of considerable importance. Other measures, in particular those relating to energy-efficient renovation, are expressly excluded from the standard determination. 

In doing so, the BMF clearly rejects the frequent practice of equating energy efficiency with raising standards. An upgrade is generally only considered to have taken place if at least three of the four key features have been significantly improved. In substance, this corresponds to the previous administrative and judicial line; what is new, however, is the explicit standardization of this threshold. The overall assessment that was previously required has been replaced by a standardized rule. This increases legal certainty, but at the same time narrows the scope for atypical circumstances.

The detailed positive and negative examples used by the BMF to further define the concept of standard raising are also of particular importance. In the area of heating installation in particular, it is clarified that simply changing the energy source does not normally constitute standard raising.

4. Production costs and the “original condition”

In the area of production costs, the letter specifically clarifies the term “original condition” of a building. The decisive factor is generally the condition at the time of construction or purchase. In the case of acquisition free of charge, the date of construction or the last purchase by the legal predecessor must now be explicitly taken into account.

This clarification is dogmatically consistent, as otherwise a continuously updated reference condition would arise in the case of multiple transfers free of charge. In practice, however, this means that taxpayers may have to describe conditions that date back decades.

The clarification of the so-called renovation in installments is particularly relevant in practice. The BMF clarifies that a significant improvement may also exist if individual measures are not yet subject to capitalization on their own, but are part of a planned overall measure. Such an overall measure can generally be assumed if the work is carried out within a period of three years. This time-based classification provides clarity, but increases the risk of measures originally treated as maintenance expenses being reclassified retrospectively.

5. Acquisition-related production costs and retroactive effect

In the area of acquisition-related production costs, the letter confirms the well-known 15% limit, but extends its scope of application. Of particular note is the explicit inclusion of cosmetic repairs in the calculation of the limit, regardless of any close factual or functional connection with other measures.

Of considerable significance is the classification of subsequent exceeding or falling below the 15% limit as a retroactive event within the meaning of Section 175 of the German Fiscal Code (AO). This means that tax assessments for previous years must be amended as soon as the final classification of the expenses is determined in the second or third year after acquisition. This significantly increases the importance of ongoing monitoring and documentation for taxpayers and advisors.

6. Burden of proof, obligations to cooperate, and circumstantial evidence

Finally, the letter explicitly regulates the burden of proof. In principle, the tax office bears the burden of proof for facts that lead to the assumption of acquisition or production costs. At the same time, however, the BMF emphasizes the taxpayer's increased obligation to cooperate if the original condition of a building can no longer be determined.

Of particular significance is the list of circumstantial evidence, which is mentioned explicitly for the first time and which the tax authorities can use to conclude that a standard increase has taken place. This includes, in particular, comprehensive renovation work carried out shortly before the acquisition, high expenditure on key features, and a significant increase in rent after completion of the work. In practice, this circumstantial evidence will play a key role, particularly in tax audits.

7. Overall assessment

The BMF letter dated January 26, 2026 does not represent a fundamental material reorientation, but rather a dogmatic consolidation and standardization of the previous administrative opinion. The increased density of regulations leads to greater legal certainty, but at the expense of individual scope for argumentation.

For tax advisory practice, this means that structuring considerations must be made even more ex ante. Acquisition, scope of renovation, timing of measures, and documentation of the initial condition are becoming increasingly important. In future tax audits, the letter is likely to be used as a key reference document.