Ruling of the Federal Fiscal Court (BFH) of 26.09.2023 – Ref. IX R 13/23
If a property is sold within the speculation period of ten years, the capital gain must be taxed. Exceptions to the speculation tax can only occur if the owner either lived in the property themselves or if it was occupied by their dependent adult child. This was clarified by the Federal Fiscal Court (BFH) in a ruling on September 26, 2023 (Ref.: IX R 13/23).
If a property is bought and then sold within ten years, it constitutes a so-called private sale transaction, and the profit from the sale is subject to income tax. However, the capital gain can be tax-free if the owner used the property themselves at the time of sale and in the two preceding years, or if their own children lived in the property free of charge, explains the law firm MTR Legal Rechtsanwälte, which provides advice in tax law among other areas. Self-use cannot be claimed if the property was occupied rent-free by the mother, mother-in-law, or other relatives. This is also highlighted by the ruling of the Federal Fiscal Court.
Condominium Provided Free of Charge to the Mother
In the underlying case, a couple purchased a condominium in 2009 for €177,000. They allowed the plaintiff’s mother to live in the apartment free of charge. After the mother passed away, the couple sold the condominium in 2017, thus within the ten-year speculation period.
The tax office considered the sale a private sale transaction and assessed income tax accordingly. The couple contested this, arguing that the apartment had been used by them, thus the capital gain should be tax-free.
BFH: No Use for Own Residential Purposes
Their lawsuit was unsuccessful both at the Tax Court and the Federal Fiscal Court. The BFH stated that the plaintiffs did not use the apartment for their own residential purposes. Therefore, the capital gain is not tax-free. If the period between the acquisition or completion of a property and its sale is less than ten years, the capital gain is exempt from taxation only if the property was used exclusively for own residential purposes during this period or was used for own residential purposes in the year of sale and the two preceding years, the BFH explained.
Use for own residential purposes means that the taxpayer actually resides in the property permanently and not just registers an address there or occasionally visits. Self-use also applies if the taxpayer provides the apartment to their dependent child, the BFH stated. However, providing the apartment rent-free to another family member does not count as use for own residential purposes, the judges clarified. Accordingly, the plaintiffs cannot claim the use of the condominium by the plaintiff’s mother as their own residential use.
Tax Exemption Only Possible Under Strict Conditions
The BFH further stated that the provision for tax exemption under § 23 Abs. 1 Satz 1 Nr. 1 Satz 3 EStG must be interpreted narrowly. Therefore, there is no reason to extend the benefit of providing the apartment to an income-tax-relevant child to other cases. Unlike with a dependent child, a support obligation in other cases cannot be assumed without individual case examination. Here, no support obligation of the plaintiff towards her mother was established. There is no relationship between the plaintiff and his mother-in-law, so the plaintiff was not obligated to provide support, the BFH explained.
As the ruling shows, a tax exemption for the sale of a property within the ten-year speculation period is only possible under strict conditions.
MTR Legal Rechtsanwälte provides advice in tax law and offers experienced lawyers to assist you in tax disputes with the tax authorities.
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