Supreme Court rules on tax depreciation on commercial real estate
On 1 April 2005 the Dutch Supreme Court issued an important decision for corporate investors in real estate.
The Supreme Court reconfirmed that it is allowed to depreciate on real estate investments and that the capital gain realised upon sale of real estate can be used for reinvestments and thereby defer taxation on the capital gain. Real estate intended for sale, on the other hand, is treated as stock and for such property it is not possible to amortise nor to use the reinvestment facility.
Real estate that will be sold on short term but that is rented out for the time being, has a special tax status. Such property has both the characteristics of an investment and of stock. The Supreme Court now decided that it is possible to amortise on such real estate but the reinvestment facility cannot be used.
Regretfully the Supreme Court gave no further guidance how the term ‘short term’ should be read. From the Lower Tax Court decision it appears that a one year period is to be regarded as short term whilst a three year period is long enough to qualify as a genuine investment.
An interesting element in this case is that the Lower Tax Court stipulated that a real estate investment company is deemed to have a permanent intention to reinvest the property that it sells. This makes the use of the reinvestment facility a lot easier.
