Family home comprising multiple land parcels: BFH expands inheritance tax exemption

When a child inherits their parents’ family home and subsequently occupies it as their own residence, they may – subject to certain conditions – be exempt from inheritance tax. But how far does this exemption extend where the dwelling, garden and access road are situated on separate land parcels? According to a recent ruling by the Federal Fiscal Court (Bundesfinanzhof, BFH), adjacent garden and access areas may also form part of the tax-exempt unit.

The case in dispute: family home on multiple land parcels

A son had inherited real property from his father. The dwelling stood on one land parcel. In addition, there was an undeveloped land parcel used as a garden and a parcel serving as an access road. The tax office responsible for property valuation had grouped these three land parcels as a so-called economic unit (wirtschaftliche Einheit).

The assessed property value of this unit amounted to approximately EUR 1.38 million. However, for inheritance tax purposes, the tax office wished to take into account only the value of the land parcel on which the dwelling stood. The garden and access road were not to fall within the tax exemption for the family home.

The son, by contrast, demanded that the entire economic unit already determined be included in the tax exemption. The BFH upheld his claim.

The economic unit is decisive

In its judgment of 17 June 2026, II R 27/23, the Federal Fiscal Court delivered a ruling of importance for landowners. According to the BFH, the concept of “land” (Grundstück) in the exemption provision for family homes is to be determined under the Valuation Act (Bewertungsgesetz). The decisive factor is therefore the economic unit whose value has been determined by the competent local valuation office (Belegenheitsfinanzamt) – i.e. the tax office at the location of the property – in the property value notice (Grundbesitzwertbescheid).

Such an economic unit may comprise several land parcels. In this context, particular importance attaches to the actual use, the designated purpose and the economic interconnection of the areas.

Where a garden parcel and an access road are used permanently in conjunction with the dwelling, they may therefore form part of the same economic unit. The prerequisite is that this connection is also apparent externally.

Entries in the land register or land parcel boundaries are not, by themselves, decisive. Legally separate plots under civil law may constitute a single unit for valuation purposes. Conversely, areas that are combined into one plot in the land register may, for tax purposes, belong to different economic units.

The property value notice is binding

A further statement by the BFH is of particular practical relevance: the property value notice binds the inheritance tax office not only as regards the property value. The binding effect also extends to which areas belong to the economic unit.

Accordingly, two separate procedures must be distinguished:

• The local valuation office (Belegenheitsfinanzamt) determines the property value and the extent of the economic unit.
• The inheritance tax office subsequently decides whether the conditions for the family home tax exemption are satisfied.

If the economic unit has already been incorrectly or too narrowly delineated in the property value notice, an objection must, as a rule, be lodged against that notice. In a later objection to the inheritance tax assessment, the delineation can generally no longer be rectified.

Landowners and heirs should therefore not only review the inheritance tax assessment. It is equally important to check the preceding determination notice.

An overview of the general conditions for the family home exemption is provided in our article ‘Real property and inheritance tax: what you should watch out for and which exemptions are available’.

Which areas are not automatically tax-exempt

The judgment does not mean that every neighbouring plot becomes tax-exempt. The decisive factor remains whether the areas constitute an economic unit under the rules of the Valuation Act.

An undeveloped area must actually be used in conjunction with the family home. Mere spatial proximity is insufficient. Nor does the combination of different areas in the land register, by itself, lead to tax exemption.

Landowners cannot therefore arbitrarily influence the scope of the favoured family home by merging plots in the land register. The actual economic circumstances remain decisive.

The living area limit remains in place

The other conditions for the family home exemption also remain unchanged. In the case of acquisition on death by children, the relief is limited to a living area of 200 square metres.

In the case decided, the flat occupied by the deceased had an area of 235 square metres. Accordingly, only 200/235 of the value of the economic unit was tax-exempt.

By including the garden and the access road parcel, the relieved value nevertheless increased significantly: initially, the tax office had granted relief on only around EUR 521,000. Following the BFH’s decision, around EUR 1.17 million was relieved.

Caution during the ten-year retention period

The inclusion of additional areas also has consequences for the period after the inheritance. The family home exemption generally requires the acquirer to occupy the family home for their own residential purposes for ten years.

Important to note: where a garden parcel forms part of the tax-exempt economic unit, it is part of the relieved family home. If this area is subdivided and transferred to a third party within the ten-year period, the tax exemption may be revoked retroactively.

Before subdividing, selling or otherwise developing relieved areas, it should therefore be examined whether a subsequent tax charge (Nachversteuerung) may arise. This applies even if the dwelling continues to be owner-occupied.

Tax authorities have not yet published the ruling

At present (as of 31 August 2026), the tax authorities have not announced that they will publish the decision in Part II of the Federal Tax Gazette (Bundessteuerblatt Teil II). It is therefore currently unclear whether the tax authorities will apply this judgment beyond the individual case decided.

Until such a statement is issued, it may occur in practice that tax offices initially adhere to their previous view or await coordination within the tax administration. Affected parties should therefore review open assessments in good time and, if necessary, lodge an objection with reference to the BFH judgment.

By contrast, assessments that have become final and binding are not, as a rule, automatically amended as a result of a new judgment. Whether a correction is still possible depends on the respective stage of the proceedings and, in particular, on whether the property value notice can still be amended.

Checklist: what owners and heirs should now consider

The judgment is particularly relevant where a family home comprises multiple land parcels. Typical cases are dwellings with a separate garden, access road, courtyard or garage plot.

Owners and future heirs should therefore:

• document the actual use of all land parcels in a verifiable manner,
• jointly review the land register, the cadastral map and the property valuation,
• take account of the extent of the economic unit already during the determination procedure,
• ensure consistency between the property value notice and the inheritance tax assessment,
• keep track of open objection periods, and
• during the ten-year owner-occupation period, refrain from subdividing, selling or changing the use of relieved areas without prior examination.

Conclusion: the family home may comprise multiple land parcels

The BFH makes it clear: the tax-privileged family home does not necessarily end at the boundary of the developed land parcel. Garden and access areas used in conjunction with the dwelling may also be exempt from inheritance tax if they form part of the same economic unit for valuation purposes.

The decision can, in suitable cases, significantly expand the tax relief. At the same time, the delineation of the economic unit in the property value notice gains further importance. A careful examination must therefore take place at an early stage and must not begin only with the subsequent inheritance tax assessment.

FAQ: Answers to frequently asked questions about the family home exemption where multiple land parcels are involved

Does a garden form part of a tax-exempt family home?

Yes, a garden may be included in the tax exemption. The requirement is that it is used together with the residential property and that the tax office responsible for the location of the property (Belegenheitsfinanzamt) has determined it to be part of the same economic unit. Mere physical proximity is not sufficient.

Can several land parcels constitute a tax-exempt family home?

Yes. According to the Federal Fiscal Court (BFH) judgment II R 27/23, a developed land parcel together with jointly used garden and access-way parcels may form the eligible property. The boundaries recorded in the land register or cadastral parcel boundaries are not decisive in themselves.

What does ‘economic unit’ mean for inheritance tax purposes?

An economic unit combines areas which, based on their actual use, intended purpose and economic connection, are to be regarded as a single unit. Its scope is determined by the tax office responsible for the location of the property in the property value assessment notice (Grundbesitzwertbescheid).

Why is the property value assessment notice so important?

The property value assessment notice does not merely determine the value of the property. It also establishes, with binding effect, which areas form part of the economic unit. This determination subsequently binds the inheritance tax office.

Which assessment notice must be challenged?

Where the issue concerns the value or scope of the economic unit, the property value assessment notice must generally be challenged. However, if the unit has been correctly determined but is not fully taken into account for the tax exemption, the objection concerns the inheritance tax assessment notice. The objection deadlines must be reviewed separately for each notice.

Does the 200 m² limit also apply to the garden and access road?

The 200 m² limit relates to the living area where children acquire the property; it does not relate to the size of the garden or access road. If the dwelling is larger, the eligible value of the entire economic unit is reduced proportionately. In the case decided, 200/235 of the value was tax-exempt.

What happens if an eligible garden parcel is sold at a later date?

If a garden parcel forming part of the tax-exempt family home is subdivided and transferred to a third party within the ten-year self-use period, the tax exemption may be revoked retrospectively. Before subdivision or sale, it should therefore be examined which areas were originally eligible.

Does the judgment automatically apply to final and binding assessment notices?

No. As a general rule, a new judgment does not automatically result in the amendment of final and binding assessment notices. Whether a correction remains possible depends on the procedural status and the applicable provisions governing amendments.