By ruling of 29 October 2019 (Case No. IX R 38/17, BStBl. II 2021, 202) the Federal Fiscal Court (Bundesfinanzhof) developed a practically significant criterion for assessing contractual purchase price allocations: an allocation of the purchase price between land and building agreed in the notarized purchase agreement is binding for calculating the depreciation (AfA) assessment basis – unless it was made as a sham or is arbitrary. An allocation is arbitrary if the agreed building or land value deviates by more than 20% from the value that would result from a proper valuation. With this, the Federal Fiscal Court provides a workable quantitative guiding threshold for practice.

Background

When acquiring a rented property, only the portion of the purchase price attributable to the building is depreciable – land is excluded. The question of the standard by which the purchase price allocation is to be reviewed had long been uncertain: at what point is a contractual allocation "arbitrary" in the tax sense?

The case

A condominium unit in a larger residential building was acquired. The parties to the purchase agreement had agreed on a purchase price and made a purchase price allocation in the agreement that showed a comparatively high building share. The tax office doubted whether the contractual allocation appropriately reflected the actual value relationships and wanted to apply a different allocation. The fiscal court sided with the tax office. The Federal Fiscal Court overturned the decision.

The decision

1. Basic rule: contractual allocation is binding. An allocation of the total purchase price between land and building made by the contracting parties in the notarized purchase agreement must be applied for taxation purposes. It corresponds to the principle of contractual autonomy and generally reflects the parties' intent regarding the actual value relationships.
2. Exception: sham transaction or arbitrariness. The contractual allocation is not binding if it was (i) made merely as a sham (Section 117 of the German Civil Code (BGB)), or (ii) is arbitrary, i.e., fundamentally fails to reflect the actual value relationships.
3. The ±20% threshold. As a guiding point for assessing arbitrariness, the Federal Fiscal Court develops the ±20% criterion: if the contractual allocation deviates by no more than 20% from the result of a proper valuation (e.g., pursuant to ImmoWertV), it is not arbitrary and is therefore binding. Only a deviation of more than 20% indicates arbitrariness and justifies a tax adjustment.
4. Significance of the methodology. The court clarifies that the benchmark for comparison is not the Federal Ministry of Finance (BMF) working aid, but rather a proper valuation using recognized methods (sales comparison approach, income approach, cost approach). Only if the result of such methods deviates by more than 20% from the contractual allocation can the tax office intervene.

What this means for landlords

• Making use of the scope for structuring. The ±20% threshold opens up scope for negotiation: buyers and sellers can formulate the purchase price allocation in the agreement so as to maximize the building share – supported by a market appraisal report – without entering the arbitrary range.
• Appraisal report as safeguard. To demonstrate that the contractual allocation falls within the ±20% range, an ImmoWertV-based appraisal report documenting the value relationships at the time of acquisition is recommended. This appraisal report also provides protection in the event of later tax audits.
• Relationship to the BMF working aid. The BMF working aid is not a suitable benchmark for assessing arbitrariness – it does not reflect actual market prices (cf. IX R 26/19). The tax office cannot object to the contractual allocation solely because it deviates from the working aid's result.