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, real estate and housing share renovations are divided into 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in order to update the general appearance of the building or apartment or, for example, replacing or improving outdated permanent fixtures.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 include, among other things, wallpapering and painting walls, remodelling windows or doors, and replacing household appliances such as refrigerators. In addition to this, replacing permanent fixtures, such as kitchen cabinets or bathroom equipment, also falls into the category of annual repairs. Thus, annual repairs refer mostly to superficial, smaller-scale renovation work, whereas modernisation means increasing the standard of the house or apartment or renewing structures that have reached the end of their operating life. 

Oftentimes, a renovation project will consist of both annual repairs and modernisation work, which means that costs need to be monitored accurately for tax purposes.

Modernisation work includes any work done to increase the size of a building or apartment, major renovations and alterations, as well any renovation projects extending to structural elements of the apartment or the house. 

Modernisation is a more extensive project than annual repairs. It aims to increase the size or standard of the building or apartment, therefore improving it. Modernisation can include installing balcony glazing, improving the heating or ventilation systems, repairing or upgrading electrical systems, as well as constructing or improving water or plumbing systems or equipment.

Other major renovations, such as any work that reaches the foundations or other structures of the house or building, are also generally considered modernisations. In addition to this, any major alterations to the interior spaces of the building or apartment, such as converting a cold store room into a sauna or a recreational space, also fall within the category of modernisations.

Even though different renovation works are divided into their own categories when it comes to taxation, things may not always be as black and white in practice. In most cases, renovation work done on a property or an apartment can fall under both annual repairs and modernisation, especially if the renovation is extensive and covers the entire apartment or building.

The best course of action in these cases is to divide the renovation costs clearly into modernisation and annual repair costs according to the nature and scope of the work. 

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. 

Tax credit for household expenses is not available for materials or travel expenses, so in order for the tax credit to be granted, the final invoice must clearly specify the cost of work. You can claim tax credit for household expenses on the Finnish Tax Administration’s website using your personal online bank identifiers.

Deduction for home loan interest

Either all or part of the interest paid on a mortgage or home loan can be claimed as a tax deduction. The rate that the interest can be deducted at depends on, among other things, what purpose the apartment or building is used for. If the mortgage has been taken out for the purchase of a family's permanent home or for the renovation of a home in 2020, 15% of the interest on the mortgage can be claimed as a tax deduction. In 2021, the deductible amount will be decreased to 10%.

If the loan has been taken out in order to purchase a building or apartment for investment purposes, the interest can be deducted in full. The reason for this is that if the building or apartment is purchased for investment purposes, the loan is considered to be obtained for the purposes of production of income. 

The interest on an ARAVA loan, i.e. a so-called annual fee loans, is not deductible

The deduction for home loan interest will be decreased in 2021, and phased out completely by 2023

It is set to be retired completely by 2023, and until then, the deduction rate will be decreased gradually each year. 

This represents a significant change, as even first time home buyers will not be able to utilise these tax concessions after the year 2022. In an article written for the magazine Taloustaito in 2019, Ulla Simola estimates that the tax benefit for Finnish homeowners will shrink from 4.5 per cent to only 1.5 per cent between 2020 and 2022. In practice, this means that the tax benefit for an interest payment of 1,000 euros will decrease from 45 to 15 euros within two years. As the tax deductions are decreased, finding a good house or renovation loan becomes even more important.

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. 

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.