Transfer of real estate for partial consideration

No private sale transaction in the case of transfer of real estate for partial consideration less than the historical acquisition costs

A private sale transaction (formerly “speculative transaction”) within the meaning of Section 23 (1) of German Income Tax Act (EStG) exists if the period between the acquisition and sale of an asset held as private assets does not exceed the relevant sale period - e.g. 10 years in the case of real estate. A private sale transaction therefore requires both an acquisition for consideration and a sale to a third party for consideration. Transactions for no consideration, on the other hand, are neither acquisitions nor disposals. The Lower Saxony Fiscal Court ruled on a special, but in practice more frequent case in its decision of May 29, 2024 (Case No. 3 K 36/24). 

In the case in dispute, the father had transferred a developed property to his daughter by way of anticipated succession within the ten-year period. The current market value of EUR 210,000 was higher than the original acquisition costs of EUR 143,950. At the time of transfer, the property was encumbered with a bank loan of EUR 115,000. The daughter took over the obligation to repay the loan, so that the tax office considered the conditions for a taxable private sale transaction to be fulfilled. As the loan of EUR 115,000 was below the market value of the property, the transfer was only for partial consideration. In order to determine the capital gain, the tax office divided the transfer into a portion for consideration and a portion free of charge in the ratio of the market value of the property to the loan liability assumed. The actual acquisition costs of the father were not taken into account. The appeal against the taxation of a capital gain calculated in this way was successful.

The tax office's calculation scheme does not correspond to the purpose of Section 23 EStG to subject the ‘realised increase in value’ from short-term sales transactions of real estate held as private assets to taxation. In the opinion of the court, there can be no ‘realised increase in value’ in the case of partially paid transfers of real estate by way of anticipated succession - at least below the historical acquisition costs as in the case in dispute. In addition, the tax office's approach results in double taxation of this situation with income tax on the one hand and gift tax on the other. Even if the relevant allowances under the Inheritance Tax Act had not yet been utilised, the tax disadvantage, namely the double taxation, could arise through further gifts from the father or an inheritance.

In the absence of an actual surplus, there is also no reason to divide the uniform transfer agreement by way of anticipated succession into a part for consideration and a part free of charge based on the market value. The tax office's calculation method results in a merely fictitious capital gain for the plaintiff father. This is because, at the time of the transfer, the property was in fact unencumbered with a balance of EUR 28,950; the father's assets actually decreased as a result of the transfer due to the higher original acquisition costs compared to the residual loan. This means that the father has not become more economically capable as a result of the transfer to his daughter. On the other hand, the German Basic Law requires taxation to be based on economic capacity. In the opinion of the court, the taxation of a purely fictitious income by using the market value instead of the actual acquisition costs would therefore not comply with the general principle of equality and would therefore not be constitutional. The use of the market value for taxation under the Inheritance and Gift Tax Act does not conflict with this due to the special regulation contained in the aforementioned law with regard to the Valuation Act and the need for equal taxation.