Private real estate sales in the context of succession cases and own-use

Background

Private sales transactions involving real estate would generally be subject to tax if the time period between the purchase and sale is no longer than ten years. The only exception to this is for buildings that were used exclusively for own residential purposes during the period between acquisition and sale, or in the year in which the sale took place and in the two preceding years.

Purchase of a share of the inheritance from a community of heirs

The Federal Fiscal Court (Bundesfinanzhof, BFH), in its decision of 26.9.2023 (case reference: IX R 13/22), specified that if a member of a community of heirs purchases an additional share of the inherited estate that includes a property and sells this property at a profit within ten years then this would not be deemed to be a private sales transaction. Specifically, the case involved the inherited estate of a community of heirs made up of A and B; the testator’s estate consisted of a property that he himself had used until his death. In 2020, A purchased one half of the share in the community from B for €250,000 and, in 2023, A sold the property for €600,000. From the above-mentioned BFH decision it thus follows that anyone who, as a member of a community of heirs, purchases a share of the inherited estate that includes a property that they then sell within ten years will not trigger a transaction under Section 23 EStG.

Waiver of a usufruct right

Furthermore, the Münster tax court, in its ruling of 12.12.2023 (case reference: 6 K 2489/22 E), decided that the waiver of a usufruct right in exchange for consideration did not constitute a sale as defined in Section 23 EStG. In the case in question, a usufruct right over a property was allocated to a taxpayer, in 2008, through a bequest. In 2012, she gave the property to a Kommanditgesellschaft [German limited partnership] in which, as a partner, she held a stake. The rental revenues constituted extraordinary operating income. After she left the Kommanditgesellschaft in 2018, she transferred the usufruct right at a value of €0 to her private assets and, from then on, treated the rental revenues as income from letting and leasing. In November 2019, she waived her usufruct right in exchange for a compensation payment. 

A usufruct is an in rem right of use detached from the aggregate of rights involved in the ownership of an encumbered object and, therefore, constitutes an asset within the meaning of Section 23 EStG. In 2018, the taxpayer thus withdrew the usufruct right by transferring it to her private assets. However, the waiver of the usufruct right in exchange for consideration in 2019 did not constitute the sale of the usufruct. This is because a sale requires not only the payment of a consideration for the transfer transaction but also a change in the owner of the right to the asset that has been sold. Consequently, the waiver of the usufruct right would not result in this asset being transferred (back) to the property owner but, instead, to its expiry. In this respect this constitutes a permanent withdrawal of an asset in its substance and, therefore, a transaction akin to a sale that is however not covered by Section 23 EStG.

Please note: Up to now, there has not been a BFH ruling on whether the waiver of a usufruct right in exchange for consideration constitutes a sales transaction or merely a transaction akin to a sale in the context of Section 23 EStG. That is why the Münster tax court permitted an appeal. 

Own-use real estate 

Furthermore, in the context of own-use real estate, the courts also recently ruled on tax exemptions for the sale of a garden plot as well as of a residential property that had been used by the mother(-in-law). 

Sale of a garden plot 

The BFH, in its ruling of 26.9.2023 (case reference: IX R 14/22), made a decision on real estate that was almost 4,000 sq. m in size and which was used mainly as a garden. The real estate was subdivided into two sub-areas and, firstly, was used as a residence and then, secondly, sold within the ten-year divestment period. In its new ruling, the BFH clarified in relation to the second sub-area that the tax exemption would only apply if the taxpayer had lived at the property. However, when there is no building on a plot of land then it is not possible to live on the undeveloped plots so that the exemption will not apply. This would also be the case even if part of the plot that had previously been used as a garden is separated off and then sold. Dividing up a previously single asset of land gave rise to the creation of two new assets (plots) whose use for own residential purposes has to be considered separately in each case. 

Provision of an apartment

Furthermore, the BFH, in its ruling of 14.11.2023 (case reference: IX R 13/23), had to rule on an apartment that had been provided to the mother(-in-law) of spouses. After the death of the mother(-in-law), the couple sold the apartment within the ten-year time limit and claimed a tax exemption for the capital gain on the grounds of own use because the use of the apartment by the mother(-in-law) should be regarded as their own use. In the view of the BFH, the general assumption behind the term ‘use for own residential purposes’ is that the taxpayer themself will live in the property. The taxpayer themself has to, at least, also use the building. The only situation that would not be detrimental from a tax point of view would be if the taxpayer lived there together with their family member or a third party. Use for own residential purposes would be deemed not to have occurred, in particular, if the apartment had been provided not just to a child who has to be taken into account for income tax purposes but, at the same time, to a third party (e.g., the child’s mother).