Deducting renovation expenses in taxation

Annual repairs and modernisation projects are a routine part of every homeowner’s life. Sometimes the renovation work only entails more smaller-scale superficial work to improve the overall appearance of the home, but every now and then, more major renovations, such as plumbing renovations or bathroom remodelling, are needed. 

Before getting started with the work or obtaining financing for the project, it is a good idea to spend some time familiarising yourself with the relevant taxation issues, as homeowners are able to deduct different types of repair or renovation costs in their taxation. Among other things, both costs incurred due to the renovation and any work done are tax-deductible, and some homeowners may even be able to deduct the interest on a home improvement loan in their own taxation.

Deducting repair costs is not difficult, since nowadays, you can choose to claim deductions either online using your personal online bank identifiers or by filling out a more traditional paper form. 

How and if the costs can be deducted depends not only on the purpose the apartment or house is used for, but also on the nature of the project, since in the context of taxation, renovation work of residential premises is divided into two categories: annual repairs and modernisations. 

The deduction also varies substantially depending on whether external workforce has been hired, or if the house or apartment is being rented out or used by its owner. It is possible to receive tax credit for household expenses for the work carried out on an apartment or property that the owner uses themselves or has rented to a near relative.

Until 2023, the interest on renovation mortgages will also be partially deductible in Finland, but as this benefit will gradually be removed, comparing different interest rates available for renovation loans will be even more important than before

What is the difference between annual repairs and modernisation?

In Finland, renovations are classified into two main categories for taxation purposes: annual repairs and modernisations for taxation purposes. Annual repairs refer to all renovation work performed in order to update the general appearance of the building or apartment or, for example, replacing or improving outdated permanent fixtures.

• Annual repairs involve more minor work aimed at maintaining or restoring the property. These repairs typically include tasks like painting walls, replacing outdated appliances (e.g., refrigerators), updating windows or doors, and replacing fixtures such as kitchen cabinets or bathroom equipment. Essentially, annual repairs focus on improving the appearance or functionality of a property without significantly changing its structure or size.
• Modernisations, on the other hand, involve more extensive work aimed at increasing the standard of the property or renewing its core systems. This can include adding new structural elements like balcony glazing, upgrading heating or ventilation systems, or replacing or improving plumbing and electrical systems. Major renovations, such as foundational work or significant changes to the interior layout (e.g., converting rooms into saunas or recreational spaces), are also classified as modernisations.

When undertaking a renovation project, there is often overlap between these two categories, especially if the work is extensive. For tax purposes, it is crucial to clearly distinguish between annual repairs and modernisations, separating costs accordingly to ensure proper deductions. Keeping accurate records of the nature and scope of the work is key for filing taxes correctly.

When renovating your own home, you can claim any work done as a tax credit for household expenses

If you are hiring external workforce for the renovation, it is also possible to claim the cost as tax credit for household expenses. However, keep in mind that it is not possible to claim tax credit for household expenses for an DIY renovation. 

During years 2020 and 2021, the maximum amount of tax credit for household expenses for commissioned work was EUR 2,250. This credit was granted if the cost of work was 5,875 euros or higher. In other words, 40% of the VAT-inclusive price of tax deductible work can be claimed as a tax credit for household expenses. 

Claiming Tax Credit for Household Expenses

If you hire external contractors for renovation work in a home you own and use (or have rented to a close relative), the labor costs can be claimed as a tax credit for household expenses. In 2024:

• The tax credit applies only to labor costs, not materials or travel expenses.
• The credit percentage and maximum limits remain aligned with recent years. For exact numbers, consult the Finnish Tax Administration.

You can claim tax credit for household expenses on the Finnish Tax Administration’s website using your personal online bank identifiers.

However, DIY renovations are not eligible for this credit.

How are the annual repair and modernisation costs of let apartments deducted in taxation?

The annual repair costs are deducted during the same year that the costs are paid. The exact timing depends on if you as a landlord have carried out the renovation yourself, or whether it was carried out by the housing cooperative. 

Renovations commissioned by the landlord will be deducted during the same year that the costs are paid. If the renovation is commissioned by the housing cooperative, the costs may be claimed as a tax deduction if the capital expenditure charges have been recorded as revenue in the housing cooperative’s bookkeeping. 

The cost of modernisation work commissioned by the landlord must, however, be can only be claimed as tax deductions as annual depreciation or once the apartment sold. For buildings or houses, the cost of modernisation work commissioned by the landlord must be deducted as annual depreciation, and for housing cooperative units, they must be deducted as straight-line annual depreciation.Any costs incurred in connection with modernisation work performed for a housing cooperative can, however, be deducted if it has been recorded as revenue in the housing cooperative’s bookkeeping.

You should also remember that:

• Furniture purchases are not tax deductible.
• If a renter decides to renovate their apartment themselves, they are entitled to deduct the expenses from their own taxable income if the other requirements for deductibility are met.

If the renovated house or building is a let apartment, it should be taken into account in the renovation plans that any costs can only be deducted in rental income taxation if the renovation work took place after the apartment was rented out. 

For landlords, annual repair costs for rental properties are deductible in the same year they are paid if they are directly incurred by the landlord. For renovations done by a housing cooperative, costs can only be deducted if recorded as capital expenditure charges in the cooperative’s accounts. Modernization expenses are depreciated over time or deducted upon sale of the property

The best way to save on interest expenses as the deductions are decreased is to compare loan offers and choose the best available renovation loan

As the tax deductions are changing, it is pays off to compare different renovation loans to keep the loan costs as low as possible. 

Comparing loans means requesting loan offers from various banks and financial institutions either independently or using a loan comparison service. 

Sortter is one of the services that allows you to compare loans easily, quickly and free of charge.

It is important to compare different renovation loan offers, as the interest rates and loan terms of different banks may differ considerably. By comparing loans, you can save up to thousands of euros in loan costs over the loan period.