Real estate sales for communities of heirs are now tax-free

Many groups of heirs who have inherited a property wonder what to do with it. This often leads to disputes. The Federal Fiscal Court (BFH) has now removed a hurdle for the sale of real estate by groups of heirs.

If a member of an inheritance community acquires the shares in the inherited property from the other co-heirs and subsequently sells the property, the tax office demands income tax on this sale if the heir did not reside in the property for ten years between acquisition and sale. This is because the tax office considers this a private sale transaction according to Section 23 of the German Income Tax Act (EStG).

In September 2023, the Federal Fiscal Court (BFH) ruled that paying out co-heirs, acquiring their shares in a property, and subsequently selling it without living in the property for ten years is not a taxable transaction within the meaning of Section 23 of the German Income Tax Act (EStG).

Relief for heirs

This ruling brings relief to heirs. Not only financially, but it also makes it easier to find a joint solution for what to do with the shared property. With the income tax no longer applicable, heirs can more easily decide to sell the property.

How was this decision reached?

In 2015, a man inherited a woman's estate, including real estate, along with her two children. After the dissolution of the community of heirs in 2017, he took over the entire estate and sold it at the beginning of 2018.

The tax office subsequently demanded income tax. This demand was based on a regulation stating that income tax is payable if a property is sold within ten years of its acquisition. The man then appealed to the Munich Tax Court.

After losing his case in the first round of hearings in 2021, he appealed to the Federal Fiscal Court (BFH). Last September, the BFH's Ninth Senate ruled that the transfer of the inheritance share from the two children did not constitute a typical real estate purchase, and therefore the aforementioned regulation was not applicable.

The court held that the taxation of a real estate sale requires that the property in question was previously acquired. In this specific case, this requirement was not deemed to have been met.

The acquisition of shares in an inheritance within a community of heirs was not considered comparable to the acquisition of shares in real estate, even if the latter was part of the joint estate. Therefore, without a formal purchase transaction, taxation based on a private sale is not possible.

Are you unsure what to do with your inherited property? Contact us! We'd be happy to advise you.

Notice

For the sake of readability, this text uses the generic masculine form. Female and other gender identities are explicitly included where relevant to the statement.

Legal notice: This article does not constitute tax or legal advice for any specific case. Please consult a lawyer and/or tax advisor to clarify the facts of your individual situation.

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