An estimated over 400,000 properties are inherited every year. In addition, some houses or apartments are given as gifts. The new owners thus receive not only a property with all its rights and obligations. They must also pay tax on the acquisition of their property. Depending on the value of the property, inheritance or gift tax may be due. This can be avoided if the statutory tax-free allowances are observed in the will or when making the gift.
Tax-free allowances are particularly important for gifted or inherited properties
Properties have a comparatively high value. A house can quickly reach a market value of several hundred thousand euros. However pleased new property owners may be, the associated tax burden is also substantial.
The problem with such acquisitions of value: Properties cannot be sold in parts. Consequently, the new owners have to meet their obligations to the tax office out of their own pockets. If this is not possible, they must sell the property they have just acquired. In the end, only a fraction of what they actually received remains.
The tax-free allowances for inheritances and gifts are intended to protect heirs and recipients of gifts from this loss in value. The state would like to receive a share of the estate wherever possible. However, the laws provide for substantial tax-free allowances to protect the new owners. Nevertheless, the tax-free allowances must be used sensibly and purposefully.
What tax-free allowances apply to inherited and gifted properties?
The same rules apply to properties as to all inheritances and gifts. However, in this case, not everyone is equal in the eyes of the law. The relationship between the persons involved is decisive. Accordingly, there are higher tax-free allowances within the immediate family than for distant acquaintances.
The amount of the tax-free allowances is determined by the Inheritance and Gift Tax Act. Section 16 of the Inheritance and Gift Tax Act contains a list of the tax-free allowances, which are based on the family relationship.
Accordingly, acquisitions of value up to the following amounts are tax-free:
- 500,000 euros for spouses and civil partners (tax class I).
- 400,000 euros for children and children of deceased children (tax class I).
- 200,000 euros for grandchildren (tax class I).
- 100,000 euros for parents and grandparents in the case of inheritances (Tax class I).
- 20,000 euros for parents and grandparents in the case of gifts, generally for siblings and their direct descendants, stepparents, children-in-law and parents-in-law, as well as divorced partners and former partners of a dissolved civil partnership (tax class II).
- 20,000 euros for all other beneficiaries or institutions, including partners in unregistered partnerships (tax class III).
Tax classes for inheritances and gifts
Beneficiaries must pay tax on all assets or sums of money inherited or received as gifts in excess of these amounts. The tax class indicated above in parentheses is applied.
Important: Although the designations are similar, the tax classes for inheritances and gifts have nothing in common with the individual income tax classes. Rather, they classify beneficiaries, resulting in a graduated tax burden based on the family relationship.
Calculating tax on inheritances and gifts
The exact tax burden is calculated based on two factors:
- It is linked to the family relationship and thus, on the one hand, to the personal tax-free allowance and, on the other hand, to the tax class for inheritances and gifts.
- It depends on the specific amount exceeding the tax-free allowances.
This means: The tax burden is deducted as a percentage from the value exceeding the tax-free allowance. The percentage is graduated according to the value and tax class. The current exact percentages are listed in a table of the tax burden in Section 19 ErbStG.
Generally speaking: The closer the family relationship and thus the lower the tax class, the lower the burden resulting from the gift or inheritance. The law therefore particularly rewards the transfer of assets in a direct line.
Examples: As of 2022, children only have to pay seven percent tax on inherited real estate with a value of up to 75,000 euros above the tax-free allowance. Siblings already face a tax burden of 15 percent, while acquaintances pay a hefty 30 percent. The higher the taxable amount, the higher the percentage of tax payable in graduated brackets. For distant acquaintances, it increases to the maximum rate of 50 percent for particularly large sums.
There is an obligation to report inheritances and gifts!
Beneficiaries of an inheritance or Recipients of a gift must notify the tax office within three months of receiving the property. The tax office then examines the transfer of ownership and determines the tax burden.
Valuation for Taxation
The tax office generally assesses 90 percent of the property's value. The authority determines the market value using a standardized procedure. This often does not take the actual condition into account. As a result, many tax assessments tend to be too high. Owners should consider commissioning a valuation report. This applies especially when the property is in poor condition.
The Ten-Year Period: Values Are Added Together
Taxes are generally not tied to an inheritance or gift. Rather, the stated tax-free allowances apply for a period of ten years.
For example, if a mother gives her son a house worth 350,000 euros during her lifetime, he pays no tax on it. However, if the mother dies five years later and bequeaths him another property worth 250,000 euros, the total value of the transferred assets within ten years is already 600,000 euros. In this case, 200,000 euros are taxable.
Owner Cannot Pay the Tax Burden
Since properties are highly valuable, an inherited or gifted property can result in an enormous tax burden. This becomes difficult if the beneficiary's cash assets are insufficient. The following options are then available:
- The tax office often agrees to spread the tax burden over ten years.
- The new owner can take out a loan and have it entered in the land register.
- The owner can sell the property. This may result in additional tax payments.
- The beneficiary can disclaim the gift or inheritance.
Special Rule for Married Couples and Registered Partnerships
The law provides for some exceptions to the taxation of gifts and inheritances. Regarding real estate, the most important rule is the permitted gift of jointly used residential property.
Married couples and partners in a registered civil partnership can give each other real estate. No gift tax is incurred if both have their main residence together in the house or apartment. This gift is possible multiple times, provided it is a jointly occupied apartment or a jointly occupied house.
Special Feature: Usufruct Right Is a tax-reducing encumbrance
Another special feature should be taken into account by property owners who give away an apartment or house during their lifetime. If the owner has a right of residence entered in the land register, this creates a usufruct right. For the beneficiary new owner, this means an encumbrance that reduces the property’s value. As a result, houses and apartments may potentially fall below the tax-relevant exemption threshold.
Practical tip: Avoid taxes through exemption thresholds for inheritances and gifts
The legal framework leaves plenty of scope for transferring real estate. It is advisable for owners to consider during their lifetime how they wish to handle their apartments and houses. Those who proceed skillfully can help the beneficiaries save on taxes.
For example, partial gifts during the donor’s lifetime are possible. This makes it possible to transfer significant shares in real estate tax-free every ten years. However, the changes in ownership must not merely be discussed verbally; they must be entered in the land register.
Married couples and persons in registered civil partnerships should make use of the option of transferring real estate between themselves. This is particularly useful for avoiding inheritance tax resulting from serious illnesses. This also makes it possible to exclude other heirs from the compulsory portion.
Real estate: tax advantages for inheritances and gifts
Anyone who receives or inherits real estate as a gift also benefits from a considerable advantage. No real estate transfer tax is charged when a house or apartment is transferred. This can save substantial costs. For this reason, a gift is preferable to selling to relatives during one’s lifetime.