Claiming depreciation and repair expenses (rental income)
If you pay annual repair costs (current expense), they are deductible against your rental income for the year when you pay them. However, if a major or capital repair job was done (capital expense), you may only get a deduction in the form of depreciation every year, or alternatively, you may get a deduction when you sell the dwelling.
Price is deductible in the form of depreciation
If you are renting out a house or a building, its value will diminish through tax-deductible depreciation every year, and you get a tax benefit. The permissible rate of depreciation is 4% of the residual (i.e. yet undepreciated) acquisition cost of a house or building used as a dwelling, residence or office. Similarly, the permissible rate is 7% if the rented-out building is used as a retail space, store, shop, factory, workshop etc. If the buildings are rented to tenants only for some months during the year, depreciation must be computed accordingly. If you sell the building, you are not allowed to deduct any depreciation in the final year.
If you as the landlord have bought any moveable property or furniture for a rented-out dwelling, you can deduct 25% per year as annual depreciation, provided that the furniture etc. has an economic life of more than three years or its purchase price is higher than €1,000.
The Tax Administration does not perform depreciation calculations in order to deduct them automatically. To claim depreciation, report it electronically (on the Veroilmoitus verkossa; Skattedeklaration på nätet e-Service) or complete the paper-printed Form 7H (for flats or apartments) or Form 7K (houses and other real estate).
If you own a building and the land where it is located, you cannot get deductions for any depreciation of the land. Similarly, if you own shares in a housing company or real-estate company, you cannot get deductions for depreciation.
Annual repair expenses
When annual repair work is done on an apartment or building, it is for restoring its original condition. The generally accepted level of technical requirements is taken into consideration. Expenses of annual repair are deductible from your rental income the year when you pay them.
Annual repairs include
- painting and wallpapering
- purchases of new stoves, ranges, refrigerators etc. to replace the old ones
- similarly, purchases of new kitchen cabinets, bathroom fixtures etc.
- replacement of doors and windows.
Major repair and improvement expenses
More extensive work, including extensions, renovations and similar changes, is viewed as major repair, often referred to as major improvement, capital expense or capital improvement. The difference from annual repair lies in the fact that the apartment or house now reaches a higher standard or acquires some added space. In other words, the result is an improvement from its earlier standard.
Major repairs include
- conversion of a cold storage room into a sauna
- installing glazing for the balcony
- improvement of the foundation and bearing structure
- improvement of the heating and ventilation system
- having a water and sewage system built or rebuilt
- similarly, having the electric power system redone and re-installed.
Typical repair jobs in any residential property contain elements of both annual and major repair. Division of the total expenses is necessary in order to work out the permissible tax deductions in correct proportions. In these circumstances, they must be split between annual and major repair according to the quality and extent of the repairs.
Non-deductible repair expenses of a rented-out apartment
From deduction perspective it is important that a repair job is done during a period when the apartment has been available for rent.
You cannot claim expenses against rental income if you had repairs made immediately after you bought the apartment, before you made it available for tenants to obtain it. In cases like this, we add the repair costs to the apartment's acquisition price instead. They are taken into consideration later when you sell the apartment, because they have an impact on the taxable capital gain or the tax-deductible capital loss. Whether the repair falls into the category of annual repair or major, capital repair is not significant.
If you do the repair work yourself, you cannot include any compensation for your own working hours in your deduction claim. However, you may claim the expenses of buying the materials, wages to workmen, and travelling from your home to the location of the rental property.
Straight-line depreciation of major repair expenses in rented apartments
If you as the landlord have major repair and improvement commissioned and you pay for it yourself, you can deduct this expense over a ten-year period. The depreciation must be calculated under the straight-line principle, meaning that each year, you can deduct a tenth of the entire expense. If you sell the apartment or if its rental contracts are terminated before the entire improvement has been depreciated off, the undepreciated portion will be added to the acquisition price of the apartment. This affects your taxable capital gain.
Example: Lauri owns an apartment that has been rented to a tenant for many years. He has a major repair job done there. The kitchen is extended; the wall between the living room and the kitchen is taken down. The large new kitchen gets a new set of cabinets, and new appliances. The bedroom will have a small new wardrobe section, and all the walls and the ceiling are repainted.
Total expenses amount to €8,000. Lauri paid them within the 2015 calendar year. The account he drew up shows that €4,000 i.e. half of them were due to major improvements – the kitchen extension and the wardrobe, but the other half was annual repair.
Lauri may claim the annual repair expenses of €4,000 in his 2015 tax assessment. In addition, he can claim straight-line depreciation over 10 years for the improvements. This means that in 2015, he may claim €400 ( €4,000/10 years). He can deduct €400 depreciation over the nine subsequent years, which makes up a total of €3,600.
If he does not do so, the improvement expenses are directly added to the acquisition price of the apartment. They are then taken into consideration later when Lauri sells the apartment, because they have an impact on the taxable capital gain or the tax-deductible capital loss.
If you own an apartment in a housing company and repairs are commissioned by the housing company, you have a choice between paying the for repairs either as a lump sum or as instalments every month. In both alternatives, you may or not be entitled to deduction. Whether you get it depends on how the company has entered the payments in its accounting system.
If the housing company enters the incoming payments as income, you can deduct them the year when you pay them. But if it forms a balance-sheet reserve out of them, you must add them to the acquisition price of the apartment (i.e. the shares you bought), and they have an impact on the taxable capital gain or the tax-deductible capital loss you may make when selling it. Contact the property manager of the housing company for information on accounting.
More information on the deductibility of housing-company charges and fees.
Improvement expenses added to the acquisition price of a building
Capital improvement is added to the value of the property, which also increases its depreciable basis. Tax deduction is available through increased depreciation, in other words, the amount of depreciation will be higher than before.
Example: The owner of a single-family house has rented it to a tenant for the entire year. Currently, its acquisition price calculation shows €90,000 after the depreciation entered last year. During the current year, the owner commissions a major repair and improvement job costing €10,000. The expenses must be added to the residual undepreciated acquisition price of the house: now the price is €100,000 and depreciation is calculated on the new depreciable basis (€90,000 + €10,000 = €100,000). The owner may claim €4,000 (4% × €100,000) as depreciation expenses, deductible from his rental income. The remaining acquisition price for the following year is €96,000).
When computing capital gain or capital loss, no deduction is permitted on the portion of the acquisition cost that has already been deducted through annual depreciation. Similarly, if there were no deductions through annual depreciation, the improvement expenses are added to the acquisition cost in full.
No depreciation is permitted on the land where a house or building is located.
Non-deductible repair expenses of a rented-out house or building
From deduction perspective it is important that a repair job is done during a period when the property has been available for rent. You cannot claim expenses against rental income if you had repairs made immediately after you bought it, before you made it available for tenants to rent. In these circumstances, the expense is added to the value of the property, which also increases its depreciable basis. Tax deduction is available through increased depreciation, in other words, the amount of depreciation will be higher than before.
If you do any repair work on the house or building yourself, you cannot include any compensation for your own working hours in your deduction claim. However, you may claim the expenses of buying the materials, paying wages to workmen, and travelling to the location.
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