For many people in Germany, real estate is a safe and popular investment. However, anyone who sells their property too early must pay tax on the profit from the sale. The premature sale of a property is considered a speculative transaction. In this article, attorney Sascha C. Fürstenow outlines the most important tax law aspects that may be relevant when selling a property within the so-called speculation period and explains when a tax liability may arise and what exceptions exist. This article does not constitute complete tax advice.
1. sale of property within the speculation period (10 years)
In principle, capital gains from private sales transactions are subject to taxation within the speculation period of 10 years in accordance with §§ 22, 23 EStG (Income Tax Act), explains attorney Fürstenow. In order to calculate the 10-year period correctly, the date of notarization is decisive.
There are exceptions to the tax liability if the property is used exclusively for own residential purposes in accordance with Section 23 EStG or for own residential purposes in the year of sale and in the two preceding years. This can be done by the seller himself or by the child, for whom there is still entitlement to child benefit or a tax-free allowance, and given to the child free of charge for residential purposes.
This exception no longer applies to a child over the age of 25, according to the ruling of the Federal Fiscal Court (Bundesfinanzhof – BFH) dated 24.05.2022 (case no. IX R 28/21). According to the BFH, use for own residential purposes is also denied if the property is transferred to dependent relatives free of charge (ruling from 14.11.2023 – IX R 13/23). Use by the divorced spouse also does not constitute use for own residential purposes if he or she has moved out and the divorced spouse and the joint child continue to live there (ruling from 14.02.2023 – IX R 11/21).
2. tax savings through succession
If it is not possible to wait for the sale of a property before the speculation period expires, it is possible to reduce the tax burden by gifting the property to a child. It should be noted that gifts to children below the tax-free allowance (EUR 400,000) can be made tax-free. If the value of the property does not exceed EUR 400,000, it can be gifted to the children tax-free. The acquisition costs of the donor are then attributable to the child.
The speculation period previously not only affected sellers, but also the heirs of a property. In its ruling of September 26, 2023 (case no. IX R 13/22), the BFH changed its case law and ruled in favor of communities of heirs with properties in the estate. According to the BFH, there is no tax liability for heirs if an heir takes over the shares of the remaining community of heirs and sells on a property belonging to the estate. In this particular case, the husband inherited 52% of a property from his deceased wife, while his two children received the rest. The husband bought the inheritance from his children and sold the property as the sole owner. In the opinion of the tax office, the acquisition of the shares was an acquisition and as there were less than 10 years between the acquisition and the sale, the tax office taxed the capital gain. The BFH ruled in favor of the heir, as the acquisition of shares in a community of heirs cannot be equated with the purchase of a property from the estate.
3. sale of partial areas
If a property is divided and a partial area is sold within the speculation period, special rules apply to the partial area, according to attorney Fürstenow. Even if the original property was used as a whole for own residential purposes, use for own residential purposes is generally no longer justified, as both parts must be considered separately and there is no uniform use. The previous use of the undivided property is irrelevant according to the BFH ruling of 26.09.2023 (case no. IX R 14/22). Therefore, the sale of partial areas may be taxable.
4. “Three-property limit” and commercial property trading
According to the case law of the BFH, a sale is classified as commercial real estate trading if more than three properties are purchased, developed or sold within 5 years (ruling of September 22, 2022 – IX R 19/21). In such cases, not only the sale, but also the modernization and construction of the property is subject to income tax and possibly also trade tax.
Conclusion
Attorney Sascha C. Fürstenow recommends seeking advice from a tax advisor before selling real estate in order to avoid tax pitfalls. A legal review can also be relevant in parallel to tax advice if, for example, a gift of land is to be made. As every sale depends on the individual case, it may be worth consulting an expert in order to reduce the tax burden and claim income-related expenses for the sale.