Parking Garage is Not Business Property – Ruling of the BFH on February 28, 2024, Ref.: II R 27/21
Real estate that is leased to third parties does not qualify as business property but rather as administrative property. As a result, such real estate cannot be granted tax benefits under inheritance tax law. This was decided by the Federal Fiscal Court (BFH) in its ruling of February 28, 2024 (Ref.: II R 27/21).
In the context of business succession, inheritance tax benefits may be available. Under certain conditions, the heir can claim a relief of up to 85 percent. A 100 percent relief is also possible if the heir continues to operate the business while meeting the payroll requirements for at least seven years, explains the commercial law firm MTR Legal Rechtsanwälte, which advises on tax law among other areas. However, the condition for this benefit is that the property qualifies as business property. Administrative property is not eligible for this benefit.
Administrative Property is Not Tax-Privileged
In the underlying case, the BFH had to determine whether a property with a parking garage included in the deceased’s estate was considered business property or administrative property.
The plaintiff in this case was the son and sole heir of the deceased, who passed away in 2018. The inheritance included the father’s sole proprietorship, which encompassed a property with a parking garage and a gas station. The deceased had leased the gas station to a GmbH and initially operated the parking garage himself as a sole proprietor before leasing it indefinitely to his son and current heir in 2000. After the deceased’s death, the tax office assessed the value of the business property, classifying the parking garage as administrative property. As a result, it could not be granted inheritance tax benefits.
The son argued that no administrative property existed and challenged the tax office’s determination. However, his claim was unsuccessful both at the Finance Court and the BFH. The BFH upheld the classification of the parking garage as administrative property.
Properties Leased to Third Parties are Administrative Property
In its reasoning, the BFH stated that administrative property excluded from inheritance tax benefits includes properties and parts of properties leased to third parties. Essential components of a property include items permanently attached to the land, particularly buildings. Therefore, a parking garage is considered part of the property.
A “third party,” in this context, is any person who is not identical to the person leasing out the property. This could include individuals as well as corporations and partnerships. The legal basis for the lease is irrelevant for classifying the property as administrative property under inheritance tax law. The lease could occur, for example, under a rental or lease agreement, either for payment or free of charge, as the BFH clarified.
Therefore, the Finance Court correctly decided that the parking garage and gas station were properties leased to third parties. Both buildings were leased at the time of the deceased’s death.
Condition for Tax Benefits
Although properties leased to third parties may be eligible for inheritance tax benefits, this is only possible under strict conditions, such as when the deceased had originally operated the business themselves and leased it indefinitely, naming the lessee as the heir in the will. These conditions were not met for the gas station leased to a GmbH since the company was not named as the heir. However, for the parking garage, these conditions were met. It was leased indefinitely to the son, and the deceased named him as the heir. Nonetheless, the BFH ruled that a tax benefit could not be granted.
This is because the benefit cannot be applied to leased businesses that did not meet the conditions for privileged property before they were leased, the BFH clarified. In the case of the parking garage, the deceased had already leased the parking spaces to third parties for payment. Therefore, the parking garage had already been administrative property before the lease, which is not eligible for tax benefits.
BFH Sees No Unequal Treatment
The BFH also noted that classifying the parking garage as administrative property does not constitute unequal treatment compared to other types of property leasing, such as in the context of selling one’s own products in agriculture and forestry or in a brewery business. Furthermore, it does not involve the leasing of residential property, which the legislator has privileged for inheritance tax reasons in the public interest, according to the BFH.
MTR Legal Rechtsanwälte advises on inheritance tax and other tax law matters.
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