In the event of a dispute between a taxpayer and the tax authorities regarding the allocation of the fair market value of land and buildings in real terms, the fiscal courts are required to obtain an expert opinion.

Appraisals of the fair market value of buildings and land in real terms are often contentious. While an allocation of the purchase price to land and buildings is common in cases involving a contract for the purchase of real estate, the tax authorities often do not go along with the outcome based on the assumption that the allocation does not reflect the economic reality but is instead aimed at securing tax benefits, with only the building portion being depreciable for wear and tear.

The tax authorities like to fall back on a working guide of the Bundesfinanzministerium – Germany’s Federal Ministry of Finance – when it comes to allocating the purchase price in these cases. Yet, according to a ruling of the Bundesfinanzhof (BFH) – Germany’s Federal Fiscal Court – from July 21, 2020 (Az.: IX R 26/19), this does not go far enough. We at the commercial law firm MTR Rechtsanwälte can report that, in the event of a disputed real estate appraisal, the relevant fiscal court is generally required to obtain the opinion of an expert for the purposes of land valuation.

The case before the BFH concerned a plaintiff who had acquired a rented condominium in a large city for the price of 110,000 euros in 2017. The purchase agreement stipulated that 20,000 euros of the purchase price was to be allocated to the land. While the buyer assumed for the purposes of wear and tear depreciation that the building portion made up 82 percent of this, the tax office took an entirely different view on the matter. It started from a mere 31 percent as its basis, with this determination having been informed by the Bundesfinanzministerium’sArbeitshilfe zur Aufteilung eines Gesamtkaufpreises für ein bebautes Grundstück (Kaufpreisaufteilung)” [Working Guide on the Allocation of the Total Purchase Price for a Developed Plot of Land (Purchase Price Allocation)]. The buyer’s lawsuit was unsuccessful before the fiscal court.

However, the BFH disagreed with the lower court’s assessment, ruling that the Bundesfinanzministerium’s working guide did not guarantee that the requested allocation proceed on the basis of the fair market value of land and buildings in real terms. The court held that this would reduce the valuation process to a mere asset value approach, neglecting other evaluation criteria such as local and regional factors. The BFH therefore concluded that it is generally necessary to obtain an expert opinion for the purposes of the assessment.

Lawyers with experience in the field of tax law can provide counsel in the event of tax disputes with the authorities

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