Ruling by the Federal Fiscal Court on the tax-free sale of real estate in an estate
The sale of real estate belonging to an estate can be tax-free. This was decided by the Federal Fiscal Court (BFH) in a ruling dated September 26, 2023, changing its previous legal doctrine (case number IX R 13/22). This applies at least when shares of an inheritance community were previously purchased from them.
According to § 23 para. 1 sentence 1 of the Income Tax Act (EStG), a private sale transaction occurs if no more than ten years lie between the purchase and sale of a property. Then, it constitutes a private sale transaction, and income tax must be paid on the profit from the real estate sale, according to the law firm MTR Legal Rechtsanwälte, which provides advice, among other things, in tax law.
BFH: No private sale transaction in the sale of real estate from an estate
Deviation from its previous jurisprudence, the BFH decided differently in the underlying case, even though the heir had sold a property from the estate about three years after the occurrence of the inheritance. No income tax from a private sale transaction would apply, according to the BFH. The condition for this is that the disposed assets had previously been acquired.
In the case at hand, the decedent had died in 2015. Her heirs were her husband, the later plaintiff, with a 52 percent share of the inheritance, and their two children, each with 24 percent. The estate also included a piece of land. After the woman’s death, her husband and their two children were registered as co-owners of the land in an inheritance community in the land register.
With a notarial deed, the children of the decedent transferred their inheritance share in April 2017 to a third party. This third party transferred the shares a little later after exercising the statutory right of pre-emption with a notarial deed to the decedent’s husband. At the same time, the inheritance community was dissolved. In February 2018, the man finally sold the real estate originating from the estate.
Tax Office Demands Income Tax
The responsible tax office was of the opinion that the sale constituted a private sale transaction within the ten-year speculation period and accordingly assessed the income tax. It argued that by acquiring the inheritance shares from a third party, a partial onerous acquisition of the real estate amounting to 48 percent had occurred. Since less than ten years had passed between the acquisition of the shares and the sale of the property, the profit from the sale was taxable.
The lawsuit filed against the tax assessment was unsuccessful before the fiscal court. However, the BFH overturned the judgment in the appeal proceedings and upheld the lawsuit. The fiscal court had wrongly assumed a taxable gain from a private sale transaction.
BFH Upholds the Lawsuit
In its reasoning, the BFH explained that the onerous acquisition of a share in an inheritance community is not equivalent to the acquisition of real estate. Because a joint ownership interest is not a property and cannot be equated with it.
Therefore, there is also no identity between the acquired and the sold economic goods, the judges in Munich further clarified. The plaintiff had acquired the inheritance shares of the decedent’s children. However, he sold the real estate belonging to the decedent’s estate. Thus, the conditions for a private sale transaction were not met, the BFH clarified. With this decision, the BFH has changed its previous jurisprudence and opposed the view of the fiscal administration.
The BFH has provided clarity with its decision. Inheritance communities can benefit from the judgment and realize the sale of real estate in the estate without incurring income tax. However, a prerequisite is that sufficient financial resources are available to take over the inheritance shares and the heirs agree on the procedure. Especially in inheritance communities, there are often disputes about how to handle real estate in the estate, leading to tax disadvantages in the end. This should be prevented.
MTR Legal Rechtsanwälte offers comprehensive advice in tax law and in tax disputes with the fiscal authorities.
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