Transfer of Real Estate During One’s Lifetime: Tax Planning Options for Families

The transfer of real estate within the family is a key issue in estate planning. Many parents wish to transfer their home or rental properties to their children during their lifetime in order to arrange for the transfer of assets early on and take advantage of tax benefits.

While the so-called family home can be transferred tax-free upon death under certain conditions, this tax exemption generally does not apply to transfers during one’s lifetime. Nevertheless, there are various tax planning options,

which can significantly reduce the tax burden.

Below, we present some important models that frequently play a role in practice.

Chain of gifts: Making optimal use of tax-free allowances

A key tool in tax-optimized real estate transfers is the use of gift tax allowances. Under Section 16 of the German Inheritance Tax Act (ErbStG), each child may receive up to 400,000 euros tax-free from each parent every ten years.

If both parents own the property, up to 800,000 euros can thus be transferred to a child tax-free.

If, on the other hand, only one parent owns the property, a so-called chain gift may be advisable. In this case, a portion of the property is first transferred tax-free to the spouse. Subsequently, both parents can jointly gift shares to the child, thereby utilizing both tax-free allowances.

It is important that the intermediate acquirer actually has control over the property and that there is a reasonable time interval between the transfers. Otherwise, the tax office could deem this an abuse of tax planning under Section 42 of the German Fiscal Code (AO).

The so-called “family home swing”

Another well-known arrangement is the so-called “family home swing.” In this arrangement, the home is first transferred to the spouse by way of a gift. Later, the spouse sells the property back to the original owner.

Since sales between spouses are exempt from real estate transfer tax in certain cases and no income tax is levied on capital gains for owner-occupied properties, this model can be used to transfer assets within the marriage.

Subsequently, both spouses can jointly transfer the property to their children, thereby making better use of the tax exemptions. Since this arrangement is not explicitly regulated by law, it is advisable to allow sufficient time to elapse between the individual steps.

Transfer in Exchange for Right of Residence

A commonly used arrangement is the transfer of a property in exchange for granting the parents a right of residence. In this case, ownership is already transferred to the child, while the parents are allowed to continue living in the house.

The tax advantage lies in the fact that the capital value of the right of residence reduces the taxable acquisition. This can significantly lower the tax base for gift tax.

If the holder of the right of residence dies earlier than statistically expected, the value of the right of residence is adjusted retroactively.

Transferring Rented Properties

Rented properties offer additional structuring options. In such cases, a transfer in exchange for a usufruct is often chosen. Under this arrangement, the right to rental income remains with the parents, while ownership is already transferred to the next generation.

Another option is to sell the property in exchange for a seller’s loan. In this case, the child does not pay the purchase price immediately but finances it through a loan from the parents. This ensures that no gift tax allowances are used up and allows for new depreciation allowances (AfA) to accrue.

Larger Real Estate Portfolios as Housing Companies

For larger real estate portfolios, a tax-advantaged transfer as a housing company may be an option under certain circumstances. Under specific conditions, such structures can be transferred with tax benefits pursuant to Sections 13a and 13b of the Inheritance Tax Act (ErbStG).

Since the case law of the Federal Fiscal Court and the views of the tax authorities sometimes diverge in this area, it is essential to obtain a binding ruling from the tax office before implementing such an arrangement.

Family companies as a long-term solution

Another option is to establish a family real estate company. In this model, the children are given an early stake in the company that holds the real estate.

The advantage: Appreciation in the value of the real estate then accrues directly to the children, without the need for further transfers later on. At the same time, parents often retain influence over the management of the assets through provisions under corporate law.

Conclusion: Plan real estate transfers carefully

The tax-optimized transfer of real estate within the family requires careful planning. Depending on the asset structure, family situation, and property value, different structures may be considered. Early planning can help make optimal use of tax allowances and avoid unnecessary tax burdens.

As tax advisors in Düsseldorf and Oberhausen, we have many years of experience in tax planning advice regarding real estate and asset succession. Since 1979, we have been assisting clients with complex tax issues and developing customized solutions for tax-optimized asset transfers. With our expertise and in-depth knowledge, we stand by your side as a reliable partner and competent source of information for all tax-related matters.