In its letter dated 26 January 2026, the tax authorities clarify the tax classification of repair and modernisation measures and replace the guidelines from 2003 without abandoning the basic structure. Crucially, the previous framework is being confirmed, the wording clarified and the system adapted to technical developments. This provides greater legal clarity in frequently contentious cases, particularly at the interfaces between maintenance expenditure, production costs and acquisition-related production costs.
The central basis for assessment remains the standard test based on the four so-called ‘fitment features’. The new circular explicitly and exhaustively defines these features as heating, sanitary facilities, electrical installations and windows; other building components or characteristics are not included. The question of whether a standard upgrade has taken place continues to depend on whether a substantial improvement has been achieved in at least three of these four areas. This clarification resolves previous uncertainties regarding interpretation and leads to a rigorous assessment based on the property’s utility value.
Energy-efficiency refurbishment is incorporated into the system with this level of clarity for the first time, without altering the substance of the standard assessment. Thermal insulation measures – such as façade insulation or additional cladding – are expressly not taken into account for the standard assessment; they are not classified as fitting features and therefore cannot, on their own, justify an increase in the standard rating. The same applies to the replacement of a heat generator: Switching from an oil or gas heating system to a heat pump, or connecting to district heating, does not in itself lead to an increase in the standard, unless improvements are made in two further areas of fittings at the same time. These clarifications draw a clearer distinction between energy policy and tax law and resolve practical doubts without any duplication of argumentation.
The line regarding “significant improvement” remains unchanged: production costs are only deemed to exist if the utility value of the building increases significantly compared with its original condition; a mere restoration to a contemporary standard is not sufficient. The original condition continues to be linked to the time of construction or purchase for consideration; in the case of a transfer without consideration, reference must be made to the acquisition or construction by the legal predecessor. This historical perspective prevents a standard that is considered average today from being automatically regarded as an improvement if it already corresponded to the average standard at the time.
Of key practical importance is the shortening of the timeframe for phased measures. The presumption rule for ‘renovation in instalments’ now covers only three years rather than five. Measures that are scheduled to extend over this period and, taken as a whole, increase the utility value may still lead to a uniform assessment; however, the harmonisation of timeframes reduces the risk that works spread out over a long period will be retrospectively grouped together as a single measure. At the same time, it remains the case that even minor extensions may give rise to production costs; the circular does not provide for a materiality threshold in this regard.
The authorities also deliberately distinguish the tax perspective from that under commercial law. According to IDW RS IFA 1 (as amended), even a significant reduction in final energy consumption can constitute a material improvement and lead to capitalisation. From a tax perspective, this is irrelevant because the standard test focuses exclusively on the four design features, and a mere increase in efficiency is not sufficient. Consequently, identical construction measures are potentially subject to capitalisation under commercial law but are immediately tax-deductible for tax purposes, which requires clear dual documentation and separate reasoning in the balance sheet and tax returns. However, the question remains unresolved as to the continuing and legally codified primacy of the commercial balance sheet under Section 5 of the Income Tax Act (EStG) over the tax balance sheet. In this respect, statutory clarification in the Income Tax Act would be necessary.
The three-year period for production costs incurred shortly after acquisition under Section Section 6(1)(1a) of the Income Tax Act remains unaffected by all of the above, but is, to a certain extent, ‘synchronised’ by the new circular. Within the first three years following acquisition, exceeding the 15 per cent threshold in relation to the building costs means that all repair and modernisation expenses – expressly including cosmetic repairs – must be capitalised. At this level of assessment, it is irrelevant whether a standard increase applies or whether the measures are energy-related. Even thermal insulation measures that are neutral in relation to the standard test count fully towards the 15 per cent threshold if they are incurred within the time limit. The practical effect of the letter therefore lies less in a substantive amendment to Section 6(1)(1a) of the Income Tax Act (EStG) and more in the clearer separation of the assessment steps and the now consistent temporal reference points of both systems.
Finally, the statements on the burden of proof and the duty to cooperate are worth highlighting. In principle, it is the tax office’s responsibility to establish the facts that form the basis for the acquisition or production costs. If the original condition of the building or the standard at the relevant date of acquisition can no longer be established, the taxpayer’s duty to cooperate is emphasised. In the absence of cooperation, the tax authorities may infer from circumstantial evidence – such as extensive modernisation shortly after acquisition or significant increases in rent – to infer an increase in the standard. This highlights the importance of robust initial documentation (condition of the building, standard of fittings, photographs, cost breakdowns) even before work begins.
Taken as a whole, the letter provides a consistent, workable framework:
The four criteria are exhaustively defined and are therefore legally enforceable;
• Energy efficiency measures, including thermal insulation, are neutral in relation to the standard question and are no longer subject to a second justification loop;• The reduction to three years re-schedules the instalment-based capitalisation and aligns it with the logic of production costs incurred close to the date of acquisition;• And the deliberate distinction from the commercial law perspective prevents energy efficiency gains alone from triggering tax capitalisation events.
In practice, a two-stage assessment and documentation approach is recommended: Firstly, a standard assessment based on the four criteria, with a clear focus on substantial improvements in at least three areas; followed by a separate and independent assessment of § Section 6(1)(1a) of the German Income Tax Act (EStG), with a three-year time limit calculated to the day and a 15 per cent threshold, in which all relevant work is included. This allows points of contention to be anticipated and the tax treatment to be substantiated robustly.
