Sale of privately owned real estate

What should you bear in mind for income tax purposes when selling property as a private asset? Unfavorably chosen constellations can also have far-reaching consequences for you in the future.

In principle, the increase in value of real estate is subject to income tax at the individual personal tax rate, provided that there are no more than 10 years between acquisition and sale (speculation period). This applies to land and buildings. However, rights equivalent to real estate – such as heritable building rights – can also be subject to speculation taxation upon sale.

Exemption from taxation

There is an exception to taxation within the 10-year period for properties used for own residential purposes as owner-occupiers. However, undeveloped properties are not eligible.

• In the period between acquisition and sale, the property must either be used exclusively for own residential purposes (1st alternative)
• or in the year of sale and in the two preceding years must be used for own residential purposes (2nd alternative).

With regard to the second alternative, the Federal Fiscal Court has determined that a continuous use for own residential purposes of one year and two days is sufficient if the use comprises the entire middle calendar year and only one day each in the second year before the sale and in the year of sale.

Use for own residential purposes also exists,

• If the owner has given the property free of charge for residential purposes to a child who is entitled to child benefit or tax-free child allowances.

• Or if the owner has unrestricted use of a second home – i.e. in particular if it is not rented out.

The date of the contracts underlying the acquisition or sale is decisive for the exact calculation of the 10-year speculation period, unless the transfer of ownership exceptionally took place before the contract date. The 10-year holding period has only elapsed if the holding period exceeds the acquisition date by one day. As the relevant contracts must be notarized, the acquisition and disposal dates will generally be clearly traceable.

Acquisitions as part of an inheritance and free gifts during your lifetime

The prerequisite for speculation taxation is an acquisition and a disposal. Acquisition/disposal is deemed to be any transaction for consideration – including exchange transactions. However, these transactions do not include acquisitions for no consideration. Therefore

• acquisitions as part of an inheritance

• as well as purely gratuitous gifts during lifetime

do not result in any acquisition / disposal. In these cases, the acquisition by the testator or donor is decisive for the holding period.

Example

The husband died on 15.02.2023. The wife is the sole heir. The estate also included a rented property that the deceased testator had purchased in 2011. The wife sells the property by notarized contract dated 12.08.2023. The acquisition as part of the inheritance does not count as a purchase for consideration.

As there are more than 10 years between the testator’s acquisition for consideration in 2011 and the sale in 2023, no private sale transaction has been concluded. If, on the other hand, the testator had only acquired the property in 2014, the sale by the wife in 2023 would have been a private sale transaction.

Gifts during lifetime with consideration

In the case of gifts during your lifetime, however, it should be noted that consideration can lead to (partial) remuneration.

If a consideration (e.g. a sum of money or the assumption of debts) is agreed, this constitutes at least a partial acquisition for consideration by the donee and a corresponding sale by the donor.

This means that

• the donor must pay tax on a (pro rata) increase in value if the 10-year holding period has not expired or if the property was not used for the donor’s own residential purposes, and

• a 10-year period begins for the donee with regard to the (pro rata) acquisition.

Example

The father transfers a rented property to his son during his lifetime by way of anticipated succession in a notarized contract dated 24.09.2023. The notarized contract stipulates that the son also assumes the remaining debts. The father had purchased the property in full in 2020.

The assumption of the debt by the son is regarded as consideration, i.e. the father has made a sale and the son a (partially) paid acquisition. As there are less than 10 years between the acquisition in 2020 and the disposal in 2023,

• the father has triggered a taxable private sale transaction. The amount of the taxable portion depends on the ratio of the debts assumed to the value of the property at the time of the gift.

• A new 10-year period begins for the son with regard to the purchased part.

Note: If a conditional usufruct in favor of the donor is agreed as part of a gift of land, this does not constitute consideration for income tax purposes. This means that no acquisition by the donee and no sale by the donor is triggered.

Calculation of the capital gain or loss

If properties are acquired and sold within the holding period and are not used for own residential purposes, the capital gain or loss is calculated as follows:

Selling price
– Acquisition / production costs
+ Depreciation claimed
– Costs in connection with the sale
= Gain or loss on disposal

A gain is taxable in the year in which the sales price is received if the gain from all sales transactions exceeds € 600 per calendar year. In the case of jointly taxed spouses, each spouse is entitled to this exemption limit separately. Losses can only be offset against gains from private sales transactions.

Conclusion

In practice, the disposal/acquisition of private real estate between relatives often unintentionally triggers speculation taxation, which is often not insignificant. The problem is often only recognized after notarization and therefore too late. In addition to income tax issues, other areas such as real estate transfer tax or gift tax must also be carefully examined. Legal advice is therefore strongly recommended before going to the notary.