Demolition Costs and Tax: the 3-Year Rule in Germany
An investor buys a plot with an old house on it, has it demolished and builds anew. The demolition invoice goes into the Anlage V (the German tax schedule for rental income) — and the tax office strikes it out. The reason lies neither in the invoice nor in the excavator, but in something that happened months earlier: the intention with which the notarial contract was signed. This article shows the three possible outcomes, what they depend on, and why the calendar works against you.
Two amounts, one shared fate
Two items are always at stake when a building comes down, and German tax law treats them alike:
- The residual value of the building — the part of its acquisition cost that had not yet been written off through depreciation (AfA) at the time of demolition.
- The demolition costs themselves — contractor, disposal, scaffolding, hazardous-material removal, the demolition permit.
For both together there are exactly three possible outcomes, and they do not differ by nuances: the money either works in a single year, is spread across decades, or never shows up in a tax return again.
| Starting position | Treatment of residual value and demolition costs | Effect |
|---|---|---|
| Building acquired without demolition intent, demolished later | Residual value as extraordinary depreciation (AfaA), demolition costs as deductible expenses | Deductible in full in the year of demolition |
| Building acquired with demolition intent, demolition closely connected to a new build or fundamental conversion | Construction costs of the new or converted building | Spread over the depreciation of that building |
| Building acquired with demolition intent, no such connection | Acquisition cost of the land | No depreciation — land does not wear out |
Case 1: bought without demolition intent
Anyone who buys a building in order to let it and only later decides to demolish is in the most favourable position. § 7 para. 1 sentence 7 EStG expressly permits „Absetzungen für außergewöhnliche technische oder wirtschaftliche Abnutzung" — depreciation for extraordinary technical or economic wear (AfaA); § 9 para. 1 sentence 3 no. 7 EStG counts depreciation among deductible expenses. The residual value that has not yet been written off is therefore deducted in one go.
The demolition costs themselves are deductible expenses under § 9 para. 1 sentence 1 EStG — „Aufwendungen zur Erwerbung, Sicherung und Erhaltung der Einnahmen", expenses incurred to acquire, secure and maintain income — as long as the plot continues to serve letting within the meaning of § 21 para. 1 sentence 1 no. 1 EStG. That provision covers plots, buildings and parts of buildings alike; demolishing a rental property in order to let again on the same spot does not sever the link to the source of income.
Two conditions must coincide, however: the building must not have been technically or economically used up at the time of acquisition, and it must have been acquired without demolition intent. The tax office checks both — and on the second question it has a presumption on its side.
Case 2: bought with demolition intent
If demolition was already settled at the time of purchase, the whole calculation shifts. Residual value and demolition costs are then not running costs of letting but expenditure on what is meant to come next. If the demolition leads to a new build or a fundamental conversion, they become construction costs of that building within the meaning of § 255 para. 2 sentence 1 HGB — expenses „für die Herstellung eines Vermögensgegenstands, seine Erweiterung oder für eine über seinen ursprünglichen Zustand hinausgehende wesentliche Verbesserung". The money is not lost: it enters the depreciation base of the new building, which for a residential building completed after 31 December 2022 means an annual write-off of 3% under § 7 para. 4 sentence 1 no. 2 letter a EStG.
If that close economic connection is missing — the house goes so that the plot can be sold undeveloped, leased, or simply left alone — residual value and demolition costs become acquisition cost of the land under § 255 para. 1 HGB. That is the expensive outcome: land does not wear out, so there is no depreciation on it. The amount then has an effect at the earliest on a taxable sale, and once the ten-year speculation period has expired, no effect at all.
The three-year presumption
Whether someone intended to demolish at the time of purchase is written down nowhere. Case law therefore works with prima facie evidence: if demolition begins within three years of acquisition, the appearance of the facts speaks for the building having been bought with demolition intent. What counts is the date of the notarial purchase contract, not the day the keys change hands.
The presumption can be rebutted, but not by a declaration of intent. What is required is a substantiated account of an unusual course of events that was not foreseeable at the time of purchase — a fire, water damage, an official order, or a structure that only turns out to be beyond saving once renovation starts. Anything the buyer could have considered at the time of purchase will not do.
Conditional demolition intent: the costly mistake
The most common error is not made by those who plan to demolish from the outset, but by those who actually wanted to convert. Demolition intent also exists where the buyer accepted demolition as a possibility should the planned conversion prove impracticable. Anyone who buys a visibly derelict property intending to strip it back, while reckoning that it might have to go after all, already has demolition intent for tax purposes — even if the decision to demolish is only taken a year later. The later demolition is then not a fresh decision but the realisation of a variant contemplated from the start.
Worked example
An apartment building is bought for €420,000, of which €280,000 is attributed to the building under the purchase-price allocation. After five years of letting at 2% straight-line depreciation, €28,000 has been written off and the residual value is €252,000. Demolition costs €46,000. Together, €298,000 is at stake.
| Scenario | Tax-effective amount | At a 42% marginal rate |
|---|---|---|
| Acquired without demolition intent | €298,000 in the year of demolition | approx. €125,160 relief, immediately |
| With demolition intent, new build follows | €298,000 spread over roughly 33 years | approx. €3,755 per year |
| With demolition intent, no new build | €0 on a running basis | no running relief |
The figures are an illustration: marginal rate, purchase-price allocation and depreciation rate all depend on the individual case. The order of magnitude holds, though — and it turns on a question that can no longer be influenced after the purchase.
When the building was already used up
The whole distinction presupposes that a building of some value was still standing at the time of acquisition. If it was already technically or economically used up — a ruin with no prospect of use — no part of the purchase price is usually attributed to it; there is then no residual value for an AfaA to capture, and only the demolition costs remain in play. The purchase-price allocation in the notarial contract thus determines how much is at stake in the first place.
A special case: declining-balance depreciation
Anyone who has opted for declining-balance depreciation on a residential building under § 7 para. 5a EStG should not count on the immediate deduction: sentence 6 of that provision expressly excludes depreciation for extraordinary technical or economic wear for such buildings. Switching to straight-line depreciation is permitted under sentence 7 — that is the route by which the AfaA becomes available again.
What to record before you buy
- Document your purpose in acquiring: the listing, financing papers, rental calculations, contractor quotes for the planned renovation rather than for a demolition.
- Record the condition at handover — photographs, a protocol, a survey where appropriate. A defect or structural problem that surfaces later only counts as unforeseeable if it was demonstrably unknown at the time of purchase.
- Insist on a defensible purchase-price allocation between land and building.
- Write down the decision to demolish, with date and trigger, as soon as it is taken.
- Keep demolition invoices separate from the construction costs of the new building — they are almost impossible to separate cleanly after the fact.
- Keep an eye on the three-year calendar running from the date of the notarial contract.
What the courts have decided
The word „Abbruchabsicht" — demolition intent — appears nowhere in the statute. The entire distinction was developed by the Federal Fiscal Court (Bundesfinanzhof, BFH) and remains the authoritative source to this day.
BFH, judgment of 13 April 2010 – IX R 16/09
The Ninth Senate, which is responsible for income from letting, states both rules that matter in practice. First: if demolition begins within three years of acquisition, prima facie evidence speaks for an acquisition with demolition intent. Second: demolition intent is also to be assumed where the buyer accepted demolition should a planned conversion prove impracticable. In the case decided, the buyers had acquired a half-timbered house built around 1800 and initially planned a conversion; that was not enough to rebut the presumption. For owners this means the intention is inferred from the circumstances, not from their own account of it. The decision is not officially published (NV) and therefore binds only the case decided, but it expressly relies on settled case law.
BFH, judgment of 27 May 2020 – III R 17/19
The case concerned a partnership and an anticipated succession, but the statement reaches further: the principles governing demolition costs apply even where the building passes without consideration. In the reasons, the Senate restates the line — for AfaA and for the immediate deduction of demolition costs on a building not yet used up at acquisition, what matters is whether it was acquired with or without demolition intent. The practical consequence: transferring a property to children or to one's own company before demolition does not wash out an existing demolition intent. The judgment is officially published (V), so the tax administration applies it to comparable cases.
Frequently asked questions
Do the three years run from the contract or from handover?
From the notarial purchase contract. That is the point in time that matters for demolition intent — the intention must exist at acquisition, not at handover.
I only realised after buying that renovation was uneconomic. Does that save me?
Only if you could not foresee it when you bought. That is precisely the constellation that failed in IX R 16/09: a buyer who knew the poor condition and contemplated demolition as a possibility already had conditional demolition intent.
What about a partial demolition?
The same principles apply. Where part of a building is demolished in order to convert the rest fundamentally, the proportionate residual value and the demolition costs form part of the construction costs of the converted building if it was acquired with demolition intent.
Does this apply to an owner-occupied house as well?
No. The immediate deduction requires a connection to a source of income. Anyone demolishing a house they live in has no deductible expenses for want of letting — the costs then belong to the newly erected building.
Can I at least claim demolition costs under § 35a EStG?
Not for a let property: the tax reduction for tradespeople's services applies only within one's own household. Where a property is let, everything runs through deductible expenses or construction costs.
Demolition invoice, residual value and build costs, cleanly separated
RenoDiary keeps purchase data, depreciation base, receipts and construction costs together per property — so that three years later it is still clear what was decided when.
Start for freeSources
- § 7 EStG (depreciation; in particular para. 1 sentence 7, para. 4 and para. 5a) — Gesetze im Internet (retrieved on 11 September 2026)
- § 9 EStG (deductible expenses) — Gesetze im Internet (retrieved on 11 September 2026)
- § 21 EStG (income from letting) — Gesetze im Internet (retrieved on 11 September 2026)
- § 6 EStG (valuation; para. 1 no. 1a, acquisition-related construction costs) — Gesetze im Internet (retrieved on 11 September 2026)
- § 255 HGB (acquisition and construction costs) — Gesetze im Internet (retrieved on 11 September 2026)
- BFH, judgment of 13 April 2010 – IX R 16/09 (three-year prima facie evidence, conditional demolition intent; NV) — full text at the Bundesfinanzhof (retrieved on 11 September 2026)
- BFH, judgment of 27 May 2020 – III R 17/19 (principles apply to gratuitous acquisition; officially published) — full text at the Bundesfinanzhof (retrieved on 11 September 2026)
This article offers general orientation and does not replace individual tax or legal advice within the meaning of § 3 StBerG. Whether demolition intent existed in a given case, and how the purchase price is to be allocated, depends on the specific circumstances; the worked examples are illustrations, not assurances.