Real estate sale & divorce: sale of co-ownership share within holding period may be taxable

Often, a property must be sold in its entirety as part of a divorce, or one ex-spouse sells his or her co-ownership share to the other ex-spouse. The problem: if a property is sold as private assets within the so-called holding period, taxes may have to be paid on it because it may be a private sale transaction.

But is this also the case if an ex-spouse sells his or her co-ownership share in the previous family property to the other? The Federal Fiscal Court (Bundesfinanzhof, BFH) has now dealt with such a case for the first time in a recent decision (BFH, ruling dated February 14, 2023, ref.: IX R 11/21).

Real estate sale within the holding period: taxable! 

If you buy a property privately, you usually assume that you will not sell this family property or the private real estate investment within the following 10 years.

However, if this is the case, the tax office is interested: because if you buy and sell a property as private assets within 10 years (so-called holding period) after the acquisition of the property, this is – from a tax law point of view – a private sale transaction. Income from the sale of real estate is therefore subject to income tax as “other income” pursuant to Sec. 22 No. 2, Sec. 23 (1) Sentence 1 No. 1 of the German Income Tax Act (EStG).

An exception applies only if the property was used exclusively for own residential purposes between the time of purchase and the time of sale or for own residential purposes in the year of the sale and in the two preceding years. According to BFH case law, it is sufficient that the property is also occupied by the person who then sold the property. It does not matter whether other persons also lived in the property.

Case before the BFH: Sale of co-ownership share to ex-spouse

The case of two ex-spouses ended up in court. They had bought a single-family house together in 2008 and were equal co-owners of the property. After the purchase, the couple lived in the property until the husband separated and moved out in 2015 – the wife and their child continued to live in the “joint” house after the separation.

As part of the divorce, disputes over the property did not go away, and only after the wife threatened to foreclose on the property did he sell her his share of the property. In his 2017 tax return, the man listed the proceeds from the sale of his co-ownership share to his ex-wife – but as tax-exempt.

The responsible tax office assessed the classification as “tax-free” differently and classified the capital gain as taxable. The husband did not agree with this. His reasoning: the house was now being used by the ex-spouses’ joint son – this would also lead to tax exemption. However, the appeal against the tax assessment was unsuccessful.

BFH ruling on the private sale of a co-ownership share

And the husband also failed before the BFH with his opinion. According to the court, he simply lacked his own use of the house. The husband had finally moved out of the joint house in 2015. There was therefore no personal use by him. According to the BFH, the fact that the ex-wife has been living in the house with the minor child since then does not constitute owner-occupation that would eliminate a tax liability.

This rule would also apply to the sale of a co-ownership share in a property between the ex-spouses in the context of a divorce. Without own use by the selling ex-husband, the capital gain from the sale of the co-ownership share in the house to the ex-wife is therefore taxable capital gain under Section 23 EStG.

Only if there had been a coercive situation that would have forced the husband to sell his co-ownership share could this be assessed differently – e.g. in the event of a forced sale. However, the mere threat of a forced sale was not sufficient for such a predicament.

Sale of divorce property during holding period may be taxable

The BFH has not yet ruled on the sale of co-ownership shares between ex-spouses in connection with a divorce. With the current ruling, it has now made a fundamental decision on this: even if the co-ownership share in a property is sold more or less voluntarily in the context of a divorce, the question of whether the sale is subject to income tax depends solely on whether the sold property is still used by the seller himself.

In this respect, in the event of a separation and a move out of the family home, there are also a number of things to consider from a tax perspective if the sale of the property becomes unavoidable sooner or later in connection with the divorce.