Donation or inheritance of rented real estate for residential purposes

10% valuation discount now also for properties located in third countries?

If real estate is given away or inherited, this process is subject to gift or inheritance tax.

If the property is rented for residential purposes and is part of private assets, there is a statutory deduction of 10% on the gift tax value. The property is then only subject to inheritance or gift tax at 90% of its value. This reduces the tax accordingly.

Bewertungsabschlag vermietete Wohnimmobilie

The background of this benefit is to promote the provision of housing as an overriding public interest.

The legal requirement for the subsidy is that the rented property is located in Germany, in a member state of the European Union or in a state of the European Economic Area.

According to the wording of the law, the transfer of properties rented for residential purposes and located in other countries is not favored.

In the case of the inheritance of a property located in Canada rented for residential purposes, the Cologne Finance Court has now raised the question whether it is compatible with the principle of free movement of capital under Union law that no valuation discount is granted for this property.

The FG Cologne sees no reason for a Canadian property to be put in a worse position and has submitted the case to the ECJ for a preliminary ruling.

Article 63 TFEU prohibits any restrictions on the movement of capital between member states, but also between member states and third countries. If the current German regulation restricts the free movement of capital, the restriction to EU/EEA states would be contrary to European law and therefore untenable.

The decision of the ECJ remains to be seen.

In the meantime, such cases of transfers of rented real estate located in third countries must be kept open at least procedurally.

Entscheidung EUGH zu Bewertungsabschlag

Basically, it should be noted that the valuation discount opens up a wide scope for design, especially in the case of plannable donations. The amount of the possible concession depends on the value of the real estate.

The legislature makes no provision as to how long a tenancy must exist. Here, for example, the conclusion of short-term, limited tenancies around the time of the donation could be considered.

In the case of a transfer of real estate to several children by way of anticipated succession, for example, tenancies between one child and the donor could be established in advance. Rented apartments are then given to the other child.

In terms of income tax, tenancies between related persons may be concluded at reduced conditions of up to 2/3rds of the local market rent. If an additional income tax loss situation arises from such a rental, this will be accepted by the tax authorities.

As tax consultants in Munich, the tax consultants at Alexia Huber & Partner Steuerberatungsgesellschaft mbB advise their clients comprehensively on all questions relating to inheritances, donations, anticipated succession and estate planning for private and business assets.

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