Transferring real estate to the next generation is a common planning objective. However, without careful planning, significant tax disadvantages may arise.
Cross-Generational Asset Protection
The transfer of real estate assets within the family is one of the most significant decisions in property law. Early and professional structuring can achieve considerable tax savings.
Gift Tax Fundamentals
Allowances
The personal allowances under § 16 ErbStG are as follows: spouses EUR 500,000; children EUR 400,000 per parent; grandchildren EUR 200,000; all others EUR 20,000.
Ten-Year Period
The allowances are renewed every ten years (§ 14 Abs. 1 ErbStG). Through successive gifts, even large estates can be transferred free of tax.
Valuation of Real Estate
Valuation is carried out pursuant to §§ 176 ff. BewG using the comparative value, capitalised earnings value or asset value method. A lower fair market value may be demonstrated by means of an expert opinion pursuant to § 198 BewG.
Structuring Instruments
Retained Usufruct
The donor retains the right to use the property and receive its income. The value of the usufruct reduces the gift tax liability and is calculated on the basis of the annual value and statistical life expectancy.
Right of Residence
The right of residence pursuant to § 1093 BGB permits occupancy but not letting. The capitalised value reduces the tax assessment base.
Maintenance Payments
The transfer in return for recurring maintenance payments offers tax advantages: the recipient may claim a special expense deduction, while the obligor is taxed on other income.
Tax Pitfalls
Pitfall 1: Reserved Powers of Disposal
Comprehensive clawback rights may jeopardise recognition for tax purposes. The transfer must be genuine and final.
Pitfall 2: Chain Gifts
A gift to a spouse with instructions to pass it on to a child is treated as a direct gift to the child.
Pitfall 3: Mixed Gifts
The assumption of liabilities by the donee may trigger a taxable capital gain for the donor.
Pitfall 4: Real Estate Transfer Tax for Distant Relatives
The exemption under § 3 GrEStG applies only to direct lineal relatives. Siblings, nephews or nieces trigger real estate transfer tax.
Timing
The earlier planning begins, the more ten-year allowance cycles can be utilised. Three full cycles are possible from the age of 50.
Conclusion
At compleneo, we provide holistic support for family property transfers -- from tax structuring and notarial certification through to long-term succession planning.
