U-turn in case law: Federal Finance Court strengthens heirs in real estate taxation

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Old real estate holdings:

Anyone who inherits houses or apartments can save taxes in the future

Photo: Ulrich Perrey / picture alliance / dpa

The case is special, but, according to inheritance law experts, quite relevant: If the estate that a community of heirs takes over from the testator also includes one or more properties, this property can be sold without having to pay speculation tax on it. The Federal Finance Court decided this in a ruling from September 2023, which was published recently (ref.: iX R 13/22).

Germany's highest financial court thus deviated diametrically from the current case law: Until now, such real estate transactions were classified as “private sales transactions” (also “speculative transactions”). With these, anyone who buys and sells one or more properties within ten years must pay income tax. This view was also represented by the Federal Ministry of Finance.

A case was heard before the BFH in which a woman who died in 2015 left behind a community of heirs consisting of three heirs. The deceased's assets included, among other things, real estate. One of the heirs acquired the shares in the community of heirs from his two co-heirs and then sold the real estate. The tax office then taxed this sale – following common practice – as a “private sale transaction” according to the Income Tax Act.

As a result, the taxpayer took legal action against the decision: First, the Munich Finance Court ruled in favor of the tax office (ref. 1 K 2127/20), that was in 2021. But the BFH has now overturned this decision.

“The BFH ruling is indeed a change of direction,” says

Dorothee von Detten

, a specialist lawyer in inheritance law from the law firm Rose & Partner in Cologne. “With its decision, the BFH has changed its previous jurisprudence and contradicted the view of the tax authorities.”

Purchase of shares in a community of heirs is not considered an “acquisition”

According to the BFH, the prerequisite for taxation is that the assets sold have also been purchased beforehand, according to the expert. However, according to the BFH's new decision, this is not the case when purchasing shares in a community of heirs.

According to lawyer von Detten, the topic of “private sales transactions” comes up regularly in communities of heirs. “Heirs regularly want to avoid the ‘speculation tax’,” she says. “The BFH’s change of direction therefore gives the co-heirs greater flexibility in the dispute.”

“The change in case law strengthens the rights of heirs and helps ensure that communities of heirs with real estate assets do not remain in existence unnecessarily for tax reasons,” says

Manfred Gabler

, managing director of the inheritance division company in Weilheim. “The practical relevance of the decision is enormous: only around 20 percent of all heirs are sole heirs. The vast majority find themselves in a community of heirs with two or more heirs.”

The expert also points out that in the case of a purchase of an inheritance share between co-heirs and a subsequent sale of the property, there is also no real estate transfer tax. “According to the Real Estate Transfer Tax Act, the acquisition of a property belonging to the estate by co-heirs in order to divide the estate is exempt from taxation,” says Gabler.