Real estate is highly valuable. When an owner dies, houses, apartments and other plots of land generally pass to the community of heirs. At first, this may be a source of great joy. However, such an inheritance also entails obligations, including loan liabilities and inheritance tax payments. Last but not least, disputes may even arise over future use. If you inherit a property, you should not only familiarise yourself with the most important basics, but also avoid potential mistakes. We explain what matters.
Inheritance: Real Estate Has Considerable Value
If you inherit a house or an apartment, the additional asset value can quickly amount to a high five- or even six-figure sum. If several properties are involved and there are only a few people in the community of heirs, the increase is even greater for everyone involved. Inheritance tax may be incurred, which can have a significant impact on how the property is handled. In practice, two other typical problems also arise:
- Properties are often encumbered by a loan. The outstanding loan amount is inherited as well.
- Properties are very difficult, and often impossible, to divide. Therefore, a community of heirs must find a joint solution for how to deal with the property. Given the particular circumstances surrounding the death of the deceased, this is often not easy.
For these reasons, an inherited property is not always a blessing. In some cases, it may make sense to disclaim the inheritance. An alternative may be to sell the house or apartment immediately.
Option: Disclaiming the Inheritance
At first glance, it may seem unattractive. But for some heirs, it may make sense to waive the inheritance. This applies, for example, if the property is still subject to a substantial mortgage. Since ongoing costs also arise, the total costs may “eat up” the increase in assets. If you are already in a difficult financial situation, inherited debt may place additional strain on or seriously jeopardise your own financial circumstances.
If you wish to disclaim the inheritance, you have exactly six weeks to do so. The period begins upon the death or determination of the succession. If this period expires, you alone accept the inheritance or automatically become part of a community of heirs – in each case with all Rights and obligations as well as financial commitments! The deadline for renunciation may be extended to six months if either the deceased or the heir is abroad at the time of death.
If you renounce the inheritance, other entitled persons will take your place according to the succession. If there is no entitled person, ownership of the deceased’s property passes to the state.
Observe inheritance tax!
When accepting the inheritance, you must expect to pay inheritance tax. This is based on the Inheritance and Gift Tax Act (§ 16 ErbStG). There are tax-free allowances up to which an inheritance is tax-free. The family relationship plays an important role. For example, spouses and partners in registered civil partnerships can inherit up to 500,000 euros tax-free in total, children up to 400,000 euros, and grandchildren as well as parents and grandparents up to 100,000 euros.
There are many further gradations, so you should consult a tax expert in individual cases. Since real estate often has considerable value, you can quickly exceed the tax-free allowance. Depending on your personal tax class (not to be confused with your wage tax class), the tax burden ranges from 15 to 50 percent of the total inherited assets exceeding the allowance. In individual cases, this burden may make it necessary to sell the property.
Tip: Inheritance tax may be avoided or reduced if the owner transfers the property, in whole or in part, during their lifetime. The same allowances must be observed.
Does the property go to a sole heir or a community of heirs?
The inheritance passes to a sole heir or a community of heirs. The consequences of these two possibilities for those affected differ considerably.
If you are the sole heir, you have free control over all transferred assets and bear all debts and ongoing costs alone. For real estate, this means that once a certificate of inheritance has been issued, you can manage, sell or occupy the property yourself without the consent of others.
However, several people often inherit a share of the estate. Unless the deceased provided for other divisions in a will, all parties inherit a proportional share according to their inheritance share (inheritance quota). For real estate, this means that there are several There is an owner. This means that a legal or testamentary division of the inheritance can also entail unequal shares. For example: If you inherit jointly with three other people, the inheritance share can also be 50 percent for the first person and 1/6 each for all the others.
The important difference when inheriting a property
In this context, one distinction is very important. Income and costs must be treated differently from the authority to dispose of the property. This means:
- Income such as rental income or proceeds from a sale, on the one hand, and ongoing costs and debts, on the other, are divided among the heirs proportionally according to their inheritance shares.
- Only the community as a whole has decision-making authority over the property. Unanimity is required for all measures such as sales, alterations, rentals, etc. Individual actions are therefore excluded, although deadlocks are also possible. There is one exception: Any member of the community may commission necessary ongoing maintenance measures. Likewise, each member of the community may take emergency measures such as repairing a destroyed entrance door or the heating in winter, as well as all steps necessary to prevent foreclosure. This distinction is intended to help protect and preserve the inheritance. In individual cases, however, the legal assessment may be disputed. Legal advice is recommended.
Can a community of heirs sell a property?
As with all important decisions, the sale of the property must be unanimous. As a member of a community of heirs, for example, you may neither offer the property without the consent of all the others nor sell it. However, an amicable sale is possible and may make sense in order to convert the inheritance into money or end a dispute over its use. Important: The sale not only incurs costs, but any remaining debt must also be paid off. This correspondingly reduces the net proceeds.
When is a partition auction unavoidable?
If a serious dispute arises over how to proceed, a so-called partition auction is possible. A member of the community of heirs can apply to the competent authorities (usually the local court) for the auction of the apartment or house. Important: The consent of the other heirs is not required for this! Rather, it has this auction has the objective of resolving disagreements and making the assets divisible.
The problem with a partition auction is the process. The relationship between the heirs is generally significantly strained due to the unilateral action, unlike in an amicable sale. In addition, a participating person may lose an intangible value (for example, their childhood home). However, the most important argument against a partition auction is the proceeds. With this approach, these are generally significantly lower than what a regular sale can yield. As a member of a community of heirs, you should therefore work toward a solution that leads to an amicable approach or the payout of individual heirs.
Practical solution: Agreement on the distribution of the estate
The community of heirs remains in existence indefinitely. This means that all parties are bound by the legal requirements and must make decisions together over many years. New heirs may even join upon the death of a member.
This can only be changed through a distribution of the estate. To this end, the community of heirs signs a notarized agreement containing its dissolution. At the same time, this document includes provisions concerning the fate of all affected properties. The heirs are free to determine the content of the agreement. As a rule, the agreement should provide for a division corresponding to the inheritance shares or equalization payments. Important: The land register entry (owner) must then be changed.
This option also includes buying the inheritance shares from some or all co-heirs or offering them one's own shares for sale. Paying out inheritance shares can be a sensible compromise to place control over the property in one hand.
Inherited a property – what now?
In many cases, the heirs can agree on a joint approach, or there is only one heir. In all cases, the question arises: How should the property continue to be used? There are various options, all of which may have advantages and disadvantages. As an heir, you have the following options in particular.
- Heir already lives in the property: In the case of childless couples or testamentary provisions, it is often the case that a sole heir already lives in the property. In this case, nothing changes for you as the sole heir except something if you no longer wish to use the property in the future, or wish to use it differently. If there is a community of heirs, living in the property may potentially create an obligation to make an equalization payment or pay out the co-heirs’ inheritance shares.
- Owner-occupation: If, as an heir, you wish to use the property yourself, you can simply move into an empty apartment or house. If there is a community of heirs, all co-heirs must agree to this owner-occupation. An equalization payment may also be required. The heirs are free to negotiate the precise arrangements.
- Personal use: If the apartment is already rented, you can claim personal use. However, terminating the tenant’s lease is only possible if you can prove the need for personal use. If there is a community of heirs, you also need the co-heirs’ consent for this.
- No change in the event of letting: If the property is a rented residential property, you, as the new owner, take over the ongoing tenancy agreements and all obligations. Inform tenants and all service providers about the new ownership circumstances. Unless other plans for use are being considered, no further changes are required.
- Letting when vacant: If the deceased was the sole occupant of the property, letting the apartment or house is an option. This generates ongoing income, but also legal obligations and maintenance costs.
Selling the inherited property
If you, alone or as a community of heirs, decide against using the property, selling it is advisable. If there are co-heirs, joint action or the prior dissolution of the community of heirs is required.
Under certain conditions, the proceeds from the sale are tax-free:
- The deceased and the community of heirs have owned the property for at least ten years, or
- the deceased and the heir have continuously occupied the property during the last three calendar years before the sale (partial years are sufficient; at least one month in the first and last year is required).
- It is also a requirement that the heir or the members of the community of heirs sell no more than three properties within five years.
In all other cases, the profit from the sale must be taxed. Selling costs are deducted from the income for this purpose. Any mortgages still outstanding are disregarded for tax purposes. The profits flow in as additional Declaration in the income tax return. The personal tax rate applies.
You achieve the maximum capital gain when selling an inherited apartment or house only if the sale is tax-free. Therefore, you should consider selling for other reasons only if your financial situation requires it, there are disputes with co-heirs, or you want to part with the property immediately for personal reasons. In most other cases, using the inherited property – at least temporarily – is financially more attractive.