In its judgment of 16 September 2015 (Case No. IX R 12/14), the Federal Fiscal Court (Bundesfinanzhof) established the fundamental rule on purchase price allocation that remains valid to this day: an allocation of the purchase price between land and building agreed in the notarial purchase agreement must be used as the basis for tax assessment, provided it is not arbitrary, was not made merely as a sham, or does not economically reflect the actual value relationships in a realistic manner. This judgment is the historical starting point of the entire subsequent line of case law on purchase price allocation.

Background

When acquiring a rented property, the amount of annual building depreciation (AfA) depends significantly on the proportion of the total purchase price allocated to the building. The higher the building share, the greater the annual tax savings. For cases in which no separate allocation is agreed in the purchase agreement, the Federal Ministry of Finance (BMF) developed its "Arbeitshilfe" (working aid) – which, however, regularly results in systematically low building shares (cf.IX R 26/19, BFH judgment IX R 12/21).

The decision

In IX R 12/14 the Federal Fiscal Court established the fundamental rule that remains authoritative to this day:

1. Contractual allocation as the starting point. If the notarial purchase agreement contains an allocation of the purchase price, this allocation is binding for tax purposes. It reflects the intent of the parties and, as a rule, mirrors the value relationships actually agreed upon.

2. Three exceptions. The contractual allocation is exceptionally not binding if:

• it was made merely as a sham transaction,
• it was determined arbitrarily (a gross deviation from the actual value relationships), or
• it is not economically justifiable.

3. No automatic application of the BMF working aid. The tax office may not reject the contractual allocation solely on the grounds that the BMF working aid leads to a different result. What matters is whether the allocation realistically reflects the market value relationships.

4. Burden of proof. If the tax office wishes to challenge the contractual allocation, it bears the burden of proof. It must specifically demonstrate why the agreed allocation fails to reflect the actual value relationships.

What this means for landlords

• Structuring the purchase agreement. The notarial purchase agreement should include a purchase price allocation supported by an independent valuation report. This allocation is generally binding on the tax office.
• No action required where values are realistic. Anyone with an appropriate allocation in the purchase agreement can rely on IX R 12/14. The tax office must state specific reasons why the allocation should be considered arbitrary.