The Acquisition of Real Property: Deferral of Inheritance Tax

Rising property values have far-reaching consequences. For example, they are increasingly leading to high inheritance tax burdens when real estate is passed on through inheritance. This can put heirs in financial difficulty. If there are insufficient liquid funds to immediately settle the inheritance tax, it may be legally possible for the acquirer of residential real estate to claim a deferral of the inheritance tax. Below is an explanation from your tax advisor in Düsseldorf and Oberhausen regarding when and how this can be implemented.

Two sections of the law are relevant here. They are particularly relevant for residential real estate that is rented out or owner-occupied. A deferral of inheritance tax may be claimed under Section 28(3) of the Inheritance Tax Act (ErbStG) and/or Section 222 of the General Tax Code (AO).

Deferral of Inheritance Tax under Section 28(3) of the Inheritance Tax Act

In this case, it is possible for the acquirer to apply for a deferral if inheritance tax is due on a qualified asset—i.e., rental housing. This is possible for a period of up to ten years. The prerequisite is that the acquirer could only pay the tax by selling the acquired property.

Tax deferral for owner-occupancy

A deferral may also be considered under the following conditions: A single-family home, two-family home, or residential property is inherited, which the acquirer actually uses as their own residence following the inheritance. In the case of property acquisition through inheritance, the deferral is available interest-free.

First, an acquirer must use other assets acquired prior to this or existing personal assets to settle the tax liability. Borrowing may also be considered here as personal or other assets. The tax authorities have frequently asserted this. Legislators are often accused of missing the mark with this broad framework. In particular, the inclusion of borrowing is very broad. The deferral option ends if the property is no longer used for personal residence.

Deferral under § 222 AO

The previously discussed § 28(3) ErbStG has no bearing on the right to a deferral under § 222 AO. General discretionary criteria apply. In this case, tax authorities may defer claims arising from the tax liability in whole or in part if the collection of the debt would cause significant hardship for the debtor and the claim does not appear to be jeopardized by the deferral.

Significant hardship

If significant hardship exists, the inheritance tax may be deferred. The acquirer’s ability to pay is thus not generally impaired, but only at the time of collection. In this case, the tax authority balances the tax creditor’s interest in full and regular payment against the taxpayer’s interest in deferring the due date of the tax payment.

Significant hardship is also generally assumed in the case of obtaining a loan under § 28(3) ErbStG or an intended sale. The effects and consequences of the COVID-19 crisis may also justify a postponement of the due date, i.e., the deferral of the tax liability.

Tax Advisors in Düsseldorf and Oberhausen

At Trimborn.Partner, we are happy to assist you with legal and tax-related questions regarding inheritance tax. Our team possesses in-depth knowledge and extensive experience in this area. Please feel free to contact us.