Preserving the value of real estate – a current option for making arrangements

Few inheritance and gift tax benefits for real estate

The German law on inheritance and gift tax basically doesn’t provide many benefits for real estate. It includes a ten-percent valuation discount for let residential properties, a benefit for transferring the family home, benefits for housing associations and a benefit for intercompany rentals. But these are often dependent on observing “subsequent holding periods”. What’s more, the courts interpret the rules on these benefits restrictively. According to the most recent judgment of the Federal Fiscal Court, for example, multi-storey car parks, shopping centres and even hotels are no longer to be considered as qualifying for benefits.

Sinking real estate value creates new potential for arrangements

The long-lasting real estate boom of the past decades drove the value of real property through the roof, which is a real obstacle when transferring real estate as part of asset and succession planning. It is therefore all the more advisable to use the potential for structuring that goes along with the loss of value from the current real estate crisis. So it is vital to consider whether to transfer real estate to the next generation as a gift or to preserve the value of the real estate for tax or to acquire cheap real estate now for the next generation with a view to the future. 

Preserving current real estate values by sale 

One possibility of preserving the current lower value of a real estate property for tax is to sell it to the next generation at the current fair market value. The acquirer can either finance this with a loan or the seller can defer payment. However, if in the latter case payment is deferred at no interest, it should be noted that the benefit this creates may constitute a taxable gift. 

The seller may then gradually waive the buying price, by which the burden of gift tax can be managed and optimised. 

This approach can also be of interest in cases where there is foreign contact because the claim for payment of the selling price does not count as “domestic assets”. For example, when transferring a property, those who are no longer solely tax residents in Germany can avoid German inheritance and gift tax if the claim for payment is later assigned at no cost or inherited. 

All in all, selling a property, as opposed to gifting it, has the advantage that depreciation potential can be used and future increases in the property’s value already flow into the next generation’s assets. Furthermore, as a rule income from the property will now be allocated to the next generation. Real estate transfer tax is not usually due on transfers of real estate within the family. 

Preserving the value of real estate by contributing it to a company 

An alternative idea is to preserve the value of the real estate by contributing it to a partnership or company. This process is more complex and usually a sensible option for a larger real estate portfolio. 

A certain amount of control over the assets can also be retained and considerable tax advantages in on-going taxation may even be potentially achieved. 

Whether preservation is worth it is a question that differs from case to case

There are numerous ways to “freeze” the value of real estate. But whether they pay off in the end or which version pays off varies from case to case. And there are also many tax and legal traps to avoid. Careful analysis and consideration on a case-by-case basis is therefore necessary. 

You have questions on the subject? We will gladly advise you on preserving the value of your real estate and on structuring your real estate portfolio in a tax-optimised way.