Purchase Price Allocation in Real Estate: When a Correction Is Mandatory

Overview of the Düsseldorf Fiscal Court Decision

The Düsseldorf Fiscal Court (Finanzgericht Düsseldorf) ruled that a contractual allocation of the purchase price between land and building must be corrected if the land value stated in the purchase agreement significantly — by around 30% — falls short of the actual fair market value (Judgment of March 12, 2024 – 13 K 1262/21 E). This ruling has important consequences for companies and investors acquiring real estate, particularly with regard to tax depreciation and investment calculations.

In the case at hand, the dispute involved a rented three-family residential building held as a private investment property. The court held that the contractual allocation could not be accepted because the land value had been understated. A deviation of approximately 30% from fair market value was deemed to be more than merely “minor.”

For the valuation, the court applied the income capitalization method. While it generally relied on an expert opinion that had been obtained, it exercised its discretion to make adjustments — for example, disregarding a discount for allegedly inferior location and moderately adjusting for divergent structural uses.

Analysis: Implications for companies

1. Risk to tax depreciation (AfA): An incorrect allocation may result in the building value — and thus the basis for depreciation — being corrected by the tax authorities. This reduces deductible expenses and can significantly impair the profitability of a real estate investment.
2. Contracts subject to judicial scrutiny: Even mutually agreed allocations between buyer and seller will not withstand review if they are not realistic. Companies should ensure at the contract stage that allocations are reasonable and consistent with standard valuation methods.
3. Importance of expert opinions and valuation methods: Independent expert appraisals are increasingly important, but they must be plausible and well-documented. Courts expressly reserve the right to make corrections within their discretion.

Practical recommendations

• Obtain a fair market appraisal in advance: Commission an independent valuation before signing the purchase agreement.
• Review allocation agreements carefully: Ensure that the allocation is market-based and transparently documented.
• Establish planning certainty: For major investments, seek early tax advice to avoid later corrections by the tax authorities.

Conclusion: The Düsseldorf Fiscal Court made clear: Arbitrary or significantly inaccurate purchase price allocations will not be accepted by the tax authorities. Companies must base their allocations on substantiated fair market values to avoid adverse tax consequences.