Tax implications of selling a property with recent renovations

Disposing of a recently renovated building

What happens when a property that has been considered a fixed asset for more than five years prior to the sale, undergoes renovations that were completed less than five years ago? Can the taxation of the capital gain from these renovations also be spread?

This question was previously addressed by the Service of Advance Rulings and recently by the Court of Cassation (March 15, 2024, F.22.0168.F).

Court of Cassation's Ruling

The Court of Cassation based its decision on accounting legislation, which defines the concept of tangible fixed assets. Buildings and related facilities owned by the company are included on the balance sheet as tangible fixed assets. These, in turn, are part of the larger category of ‘fixed assets,’ provided the buildings and facilities are used in a sustainable manner for business activities (Article 3:89 § 1, Royal Decree of April 29, 2019, implementing the Companies and Associations Code).

Based on this provision, the Court of Cassation concluded that capital gains from renovation works carried out within five years prior to the disposal of a building do not qualify for spread taxation. The ruling stated that renovation works, even if they physically form part of the property, must be distinguished from the building for accounting purposes.

The decision followed the reasoning of the Brussels Court of Appeal, which distinguished between the building and its facilities, even if the costs for the ‘facilities’ (i.e., renovations) are fully incorporated into the building.

Implications

When selling a building with recent renovations, the sale price must be divided between the building and the renovations. Only the capital gain on the building itself qualifies for spread taxation, while the capital gain on the renovations is immediately taxable.