Austria Restricts VAT Recovery on Luxury Residential Letting

Austria introduced a mandatory VAT exemption for certain high-value residential lettings on January 1, 2026. Where qualifying expenditure for an individual residential unit exceeds €2 million excluding VAT during the statutory five-year period, the landlord stops charging the usual 10% VAT on rent but loses input VAT recovery on costs attributable to the exempt letting. The rules increase the effective cost of premium residential projects but do not automatically apply to every expensive property in Austria.

The rules took effect in January 2026

The measure was enacted through the tax section of Austria’s 2025 Tax Fraud Prevention Act. The National Council approved the legislation on December 10, 2025, and it was officially published on December 23. The VAT amendments took effect on January 1, 2026.

The legislation created a special category of “particularly representative property used for residential purposes.” Letting a qualifying property is subject to a non-creditable VAT exemption.

No VAT is charged on the residential rent, but input VAT related to the exempt activity cannot be deducted. The landlord is not allowed to waive the exemption in order to preserve input VAT recovery.

Standard residential letting retains the 10% rate

Residential letting in Austria generally remains subject to the reduced 10% VAT rate where the property does not meet the new high-value definition.

Taxable residential letting normally allows a landlord to recover input VAT on qualifying acquisition, construction and operating expenditure, provided the general deduction requirements are met.

Separate components may have different treatment. Parking spaces and garages are generally subject to 20% VAT, while furniture and certain distinct services require their own analysis. Hotel accommodation is also treated differently from ordinary long-term residential letting.

The threshold is above €2 million excluding VAT

A residential property becomes particularly representative when cumulative qualifying expenditure exceeds €2 million excluding VAT. Costs equal to exactly €2 million do not cross the statutory threshold.

The costs are monitored for five years from the acquisition of the property or the start of construction. The test includes acquisition or construction costs, capitalisable expenditure and major repairs.

The purchase cost can include both the building and the underlying land. Garages, garden buildings, swimming pools and other connected structures may also count. A property may therefore exceed the limit even where the apartment or house alone cost less than €2 million.

Ordinary maintenance should not automatically be treated as a major repair or capital improvement. The classification depends on the nature of the expenditure and Austrian accounting and tax rules.

Each residential unit is tested separately

In a multi-unit building, the €2 million test applies to each individual rental unit rather than to the building as a whole.

Shared costs for the land, foundations, façade, roof and building systems must be allocated between the units using an economically reasonable method. Allocation based on residential floor area may be used as a simplification where it properly reflects the project.

Costs directly attributable to a specific apartment are assigned to that unit. A single building can therefore contain apartments taxed at 10% and higher-cost units subject to the mandatory exemption.

Developers and landlords need unit-level records rather than relying only on the accounts of the entire building.

Later expenditure can push a property over the limit

A property that begins below the threshold may enter the special regime later if additional qualifying expenditure incurred during the five-year period raises the cumulative amount above €2 million.

Extensions, capital improvements, major renovations, garages, swimming pools and other connected works may be relevant. Once the threshold is crossed, the letting of that unit becomes VAT-exempt.

Input VAT recovered in earlier periods may have to be adjusted. The adjustment period for Austrian real estate is generally 20 years, with a proportion of the previous deduction corrected for the remaining years after the use changes.

Qualifying expenditure incurred to repair damage caused by natural disasters may be excluded from the threshold calculation. Ordinary improvements and major repairs do not receive the same exclusion.

Transitional cases need careful analysis

An earlier version of this article stated too broadly that major expenditure after January 1, 2026, would automatically bring any older property into the new regime. That cannot be treated as a universal rule.

KPMG and BDO interpret the new system as applying to properties acquired or constructed from January 1, 2026. Properties acquired or completed earlier generally retain their previous VAT treatment.

Other tax advisers take a more cautious view of the transitional wording and recommend reviewing major post-2025 extensions, refurbishments and repairs to existing properties. Projects started before 2026 but completed afterward may require particular attention.

The accurate conclusion is therefore that older properties are not automatically caught. The acquisition date, construction timeline, nature of later expenditure and individual project structure must all be reviewed.

Arm’s-length rent does not preserve input recovery

The restriction is not confined to arrangements in which a company builds a residence and rents it to a shareholder, director or related person.

Once the statutory cost threshold is met, the mandatory exemption may also apply where the property is let to an independent tenant on market terms.

Before the reform, related-party arrangements were examined partly by comparing the rent and contractual terms with an arm’s-length transaction. A market-level rent no longer restores input VAT recovery where the objective cost test applies.

The measure can therefore affect professional landlords, property companies and family investment structures operating in Austria’s premium rental market.

Irrecoverable VAT becomes a project cost

The main economic effect is not the absence of VAT on rent but the loss of input VAT recovery.

VAT charged by builders, architects, advisers and suppliers becomes part of the effective investment cost. Austria’s standard VAT rate is 20%, making the impact potentially material for new development and major refurbishment.

The change can reduce expected returns, increase financing requirements and raise the rent needed to make a project viable. A later breach of the threshold also creates a risk that deductions claimed in earlier years will need to be adjusted.

VAT recovery may not necessarily be denied in full where expenditure also relates to taxable business activity. Mixed-use property may require a reasonable allocation between exempt and taxable use.

Tenants may not receive a 10% reduction

A landlord subject to the exemption stops adding 10% VAT to residential rent. This does not guarantee that the tenant’s total payment will fall by the same percentage.

The owner may seek to recover irrecoverable input VAT through a higher net rent. Whether that is possible depends on the lease, rent regulation, market demand and competition.

For new developments, the additional cost can be built into the financial model before the first lease is signed. Existing agreements depend on their tax, indexation and rent-adjustment clauses.

The economic burden may therefore remain with the owner or be passed partly to the tenant through pricing.

Hotels and serviced accommodation require separate treatment

The new rule applies specifically to the letting of property for residential purposes. It should not automatically be extended to every villa, apartment or building used for temporary stays.

Hotels, aparthotels and serviced apartments may constitute accommodation services rather than ordinary residential letting. The classification depends on factors such as length of stay, cleaning, linen changes, reception services and other hotel-like features.

An incorrect classification may lead either to the unnecessary loss of input VAT recovery or to VAT being charged incorrectly. Hybrid accommodation projects require analysis of their actual operations rather than their marketing name.

Investors need five-year cost monitoring

Owners must track all relevant expenditure throughout the statutory five-year period. Multi-unit developments require a defensible method for allocating common costs.

Particular attention is needed for phased construction, later fit-outs, extensions, garages, swimming pools and post-acquisition improvements.

A foreign company can also fall within the Austrian rules where the property is located in Austria. Holding the asset through a foreign entity does not in itself remove the Austrian VAT consequences.

As International Investment experts report, the reform removes a tax advantage from the most expensive residential projects, but the fixed €2 million threshold creates difficult boundary cases. A uniform national limit does not reflect regional land-price differences: in Vienna and popular tourism areas, much of a property’s cost may come from location rather than exceptional size or specifications. The loss of input VAT recovery will increase construction and refurbishment costs and may result in higher net rents. The greatest uncertainty concerns transitional cases, where professional interpretations of certain older and unfinished projects are not entirely uniform.