Individual Taxation

Relief for private property owners – renovation work as tax-deductible property maintenance

Until now, when private real estate owners extensively renovated their property, they risked being completely denied an income tax deduction for maintenance on the grounds of the Federal Supreme Court’s practice regarding so-called “economic new construction.” This economic viewpoint was based on the “Dumont practice” of the Federal Supreme Court, under which quasi-acquisition property maintenance could not be deducted from the income. The legislator abolished the Dumont practice as of January 1, 2010.

With its policy decision of February 23, 2023 (9C_677/2021) the Federal Supreme Court has now also abandoned its practice regarding “economic new construction.” In the case under review, the taxpayers acquired a farmhouse in serious need of renovation and refurbished it extensively. In their tax return, they declared the renovation costs as tax-deductible property maintenance, but the tax office largely refused the deduction with reference to the practice regarding economic new construction. The taxpayers successfully appealed this decision: the Federal Supreme Court concluded that the refusal to accept the renovation expenses as tax-deductible property maintenance was not compatible with the law.

Consequences of the ruling

For private real estate owners, this means that any work on a property – regardless of whether the property is newly acquired, comprehensively renovated, or gently restored – requires a separate clarification as to whether that work merely serves to restore the previous condition or whether it creates something better or new. If it is simply maintenance work, the costs can be deducted from the taxable income. If the work cannot be qualified clearly, or if it is undeniably adding value, the tax authority may refuse its deduction from the taxable income.

Private real estate owners are therefore well advised to comprehensively document the work carried out in connection with a renovation – including an inventory before and after the renovation.