Have you inherited a property that needs renovation? The costs can quickly run into five figures, but under certain conditions, the tax authorities will contribute. This article explains how you can deduct renovation costs after an inheritance for tax purposes and which strategy is right for you.
Chat with ImmoGPT for free now.
With access to Google, BORIS, and Deep Research.
The topic briefly and concisely
When renting out an inherited property, renovation costs can generally be deducted in full as advertising expenses immediately.
For owner-occupiers, 20% of the craftsmen's labour costs (up to €1,200/year) as well as up to €40,000 for energy-efficient renovations are deductible.
The 15% threshold for acquisition-related construction costs does not apply to purely inherited properties, which eases renovations in the first three years.
An inherited property is often associated with significant costs for renovation and modernisation. Many heirs wonder whether and how they can deduct these renovation costs from tax. The answer crucially depends on future use: will you rent out the property or live in it yourself? Each scenario has its own tax rules, ranging from full deductibility as business expenses to limited tax relief for tradesmen's services. Incorrect allocation can cost you thousands of euros. This guide explains the differences, highlights the important 15% threshold, and shows how with the right planning you can significantly reduce your tax burden.
Basics: Tax Treatment of Renovation Costs in Inheritance
If you inherit a property, renovation costs do not qualify as deductible estate liabilities for inheritance tax purposes. An exception is made only if the decedent had already commissioned the work but had not yet paid for it. Instead, you can claim the costs later on your income tax return, depending on how the property is used. The pivotal decision is between renting out the property and personal use, which opens two entirely different tax paths. While nearly all costs are deductible when renting, strict limits apply to personal use. Correctly categorising these expenses is the first step towards optimising your tax burden.
Summary
When renting, renovation costs are generally immediately deductible as advertising expenses.
For personal use, you can directly deduct 20% of the labour costs of craftsmen, up to a maximum of €1,200 per year, from your tax liability.
Energy-efficient renovations for owner-occupied properties are promoted with a special bonus of up to €40,000 over three years.
For pure heirs, the dreaded 15% limit for acquisition-related production costs does not apply, as an inheritance is not considered a purchase.
Scenario 1: Rent out property and fully deduct costs
If you choose to rent out the inherited property, you can deduct incurred renovation costs as business expenses against rental income. The tax office distinguishes between two types of costs with drastically different consequences. Immediately deductible maintenance costs occur when you repair or modernise existing parts without significantly altering the character of the property, for example, by replacing the heating system for €20,000. These costs reduce your taxable income in the year of payment in full. In contrast, construction costs are depreciated slowly over a useful life of up to 50 years. A clear understanding of this distinction is crucial, as shown in our article on the valuation of inherited properties. Proper declaration ensures you receive maximum liquidity and tax advantages.
Attention Standard Increase: When Maintenance Costs Become Production Costs
Even when renting out a property, immediately deductible maintenance expenses can be reclassified as production costs. This occurs when a series of measures significantly raises the standard of the property. Such a standard improvement is considered to occur when significant modernisation takes place in at least three of the four core areas – heating, sanitation, electrical systems, and windows. So, for example, if you not only replace the windows but also modernise the bathrooms and all the electrics, the total costs are considered production costs. These are then depreciated at only 2% per year over 50 years, instead of being deducted immediately. Careful planning of the renovation steps is therefore essential to avoid falling into this tax trap. A detailed analysis, as is usual with an energy-efficient renovation, helps with the delineation.
The 15% Limit: A Crucial Rule with a Key Exception for Heirs
Another important rule is the acquisition-related production costs according to § 6 Para. 1 No. 1a EStG. If the renovation costs exceed 15% of the acquisition costs of the building within the first three years after purchase, they are entirely classified as production costs. However, for heirs, there is good news: Since an inheritance is an acquisition without payment, the 15% limit does not apply to a purely inherited property. This means you can undertake extensive renovations within the first three years without fearing a reclassification. Caution is advised if you need to compensate co-heirs; this process is considered a partial acquisition for payment and can activate the 15% limit proportionately. To act safely here, a precise knowledge of the property's value, such as in the determination of market value, is fundamental.
Scenario 2: Use the property yourself and strategically save on taxes
If you move into the inherited property yourself, you cannot deduct renovation costs as advertising expenses. Instead, you benefit from the tax reduction for craftsman services as per § 35a EStG. You can directly deduct 20% of the pure labour, travel, and machine costs from your tax liability. The deduction is capped at a maximum of €1,200 per year, which corresponds to craftsman invoices of up to €6,000 in wage costs. Material costs are not eligible for deduction. An example: A painting company bills you €4,000, of which €3,000 is labour. You can deduct €600 (20% of €3,000) from your tax liability. To take advantage of this benefit, correct invoicing and cashless payment are mandatory. A funding check can uncover additional potentials.
The Climate Bonus: Up to €40,000 for Energy-efficient Renovations
For owner-occupied properties that are over ten years old, there is a particularly attractive funding option: the tax bonus for energy-efficient renovations according to § 35c EStG. Here you can deduct 20% of the renovation costs of up to €200,000 from your taxes over three years. The maximum tax benefit is therefore €40,000 per property. Eligible measures include, among others:
Thermal insulation of walls, roofs, and ceiling structures
Renewal of windows and exterior doors
Installation or renewal of a ventilation system
Renewal of the heating system in favor of renewable energies
This bonus includes material costs and is often more advantageous than the pure craftsman bonus. Although an inheritance tax calculator cannot precisely reflect the exact amount of your potential savings, it does illustrate the financial dimensions of an inheritance.
renovierungskosten-von-der-steuer-absetzen-erbe
Independent of use, proactive planning is the key to tax optimisation. Documentation and timing are crucial for success. Before taking any action, you should know the exact condition and value of the property. A neutral Auctoa valuation provides a data-based foundation for this. Consider the following strategic points:
Request detailed invoices: Always ask for labour and material costs to be listed separately for craftsmen's services.
Make payments via bank transfer: The tax office only recognises invoices settled via bank transfer. Cash payments are taboo.
Stagger projects over time: For personal use, it may be beneficial to spread larger projects over several years to fully utilise the annual maximum amount of €1,200 multiple times.
Distribution in rental scenarios: Large maintenance expenses can be evenly distributed over two to five years on request, helping to mitigate tax progression effects.
This careful preparation ensures that you don't give away a single penny to the tax office.
Conclusion: With knowledge and planning to achieve optimal tax savings
What is the difference between maintenance expenses and production costs?
Maintenance expenses are for the upkeep or modernisation of existing parts (e.g. new heating system, window replacement) and can be immediately deducted for rental purposes. Production costs create something new, extend the property, or significantly elevate the standard (e.g. extension, loft conversion) and must be depreciated over 50 years.
Can I deduct costs for personal contributions?
No, you cannot claim tax deductions for work you perform yourself (personal contributions). Only paid invoices from professional companies, evidenced by bank transfer, are deductible.
What happens if I initially use an inherited property myself and later rent it out?
As long as you use the property yourself, only craftsmen's services and energy-efficient renovations according to § 35a/35c EStG can be deducted. Once you start renting it out, any renovation costs incurred from that point can be claimed as advertising expenses. Retroactive changes are not possible.
Do I need to provide an assessment for cost deduction?
Generally, no assessment is required for the tax deduction of renovation costs. However, for energy-efficient renovations according to § 35c EStG, you will need a specialist contractor's certificate in the official format. An assessment might still be useful for determining the market value for the tax office or planning the renovation needs.
Can I combine the tax bonus for energy-efficient renovation with other grants?
No, you cannot combine the tax bonus with other state grants (e.g. from KfW or BAFA) for the same measure. You must choose between one of the two types of funding.
What documents must I present to the tax office?
You must keep the craftsmen's invoices, which clearly show separate labour and material costs, as well as the corresponding bank statements as proof of non-cash payment. These must be presented to the tax office upon request.
Additional useful links
Finanzamt NRW provides information on the flat-rate allowance for inheritance costs in the context of inheritance and gift tax.
BDO publishes an article about the inheritance tax exemption for the family home in connection with renovation costs.
Haufe explains how settlement costs can be deducted from inheritance tax.
Wüstenrot offers a guide on inheritance tax regarding real estate.
Dr. Klein provides information on inheritance tax.
FAQ
What is the difference between maintenance expenses and production costs?
Maintenance costs are for the upkeep or modernisation of existing parts (e.g. new heating system, window replacement) and can be immediately deducted if rented out. Production costs create something new, expand the property or significantly raise the standard (e.g. extension, loft conversion) and must be depreciated over 50 years.
Can I deduct the costs of personal contributions for tax purposes?
No, for work you carry out yourself (personal contributions), you cannot claim any tax deductions. Only invoices from professional companies, paid and verified by bank transfer, are deductible.
What happens if I first use an inherited property myself and later rent it out?
As long as you use the property yourself, you can only deduct craftsmen's services and energy-efficient renovations according to § 35a/35c EStG. Once you start renting it out, renovation costs incurred from that point onwards can be claimed as advertising expenses. Retroactive changes are not possible.
Do I need to provide an expert opinion to deduct the costs?
For the tax deduction of renovation costs, an appraisal is generally not required. However, for energy-efficient renovations according to § 35c EStG, you will need a specialist contractor certificate in the official format. An appraisal can be useful, though, to determine the market value for the tax office or to plan the renovation needs.
Can I combine the tax bonus for energy-efficient renovations with other grants?
No, combining the tax bonus with other government grants (e.g., from KfW or BAFA) for the same measure is excluded. You must choose one of the two types of funding.
What evidence do I need to present to the tax office?
You must keep the craftsmen's invoices that separately show labour and material costs, as well as the relevant bank statements as proof of non-cash payment. You need to be able to present these to the tax office upon request.
