When you transfer a property, property acquisition tax usually applies. However, if you want to bring a property into a sole proprietorship or partnership, it is possible to avoid the real estate transfer tax up to 100%. This also applies to the transfer of real estate from one partnership to another, provided you are involved in both. In addition, there is even the potential to make an otherwise taxable sale of a property from one partnership to another, in which one is also involved, tax-advantageous. The advantage of this is that a profit can be shown in the balance sheet of the divestiture partnership. This can then be used as proof of the value of the company in order to underpin the credit rating in credit financing. By contrast, the tax-advantaged transfer of real estate to corporations is excluded.

The Real Estate Transfer Tax Act defines how the transfer of ownership of real estate is to be treated for tax purposes. This is usually taxable. The most common case, of course, is the sale of a property, which triggers taxation with real estate acquisition tax. However, the transfer of land from private assets in the context of a conversion to a limited company is also taxable.

2. when the real estate transfer tax is waived in the transfer of real estate

Now, however, there are also certain exceptions (§ 3 GrEStG). For example, the transfer of real estate as part of a gift or inheritance is exempt from real estate transfer tax. A further tax exemption can be at least partially present if the transfer to a sole proprietorship or a partnership takes place from private and the transferring person is simultaneously also involved in these companies. And this is precisely the main object of our considerations. Similarly, however, the conversion and sale of real estate of a partnership to a sister partnership is also at least partially exempt from real estate transfer tax if a shareholder is involved in both companies. Thus, we will also take these issues into account in our contribution. In addition, the proportional tax exemption also applies if a property is transferred back from a partnership to a shareholder.

Based on a few selected examples, we now want to illustrate to what extent private individuals can avoid the real estate transfer tax when transferring real estate to private companies. It is important that the same people are also involved in the company acquiring the property. Only in this case does the law provide for at least a partial tax exemption for the real estate transfer tax.

3.1. Private person transfers real estate to partnerships

In our first example, Mr. Casa transfers a 100% owned free property to an OHG in which he holds a 70% interest. Since the property in question borders the company premises, Mr. Casa thought that it would be ideal as a customer parking space. Therefore, he now only has to clarify to what extent he incurred a burden with real estate acquisition tax when transferring the property.

The answer to this is quite simple. Since Mr Casa holds a 70 % stake in OHG, 70 % of the value of the transferred property is tax-free. So he only has to pay a real estate transfer tax on the other 30%.

3.2. Transfer of joint real estate ownership to a partnership

Now Mr. Casa, together with his wife, owns another 50% free property. Since OHG lacks storage capacity and the common property is suitable for this purpose, Mr. and Mrs. Casa decide to transfer the property to OHG. In this regard, it should be noted that Ms Casa holds only 5% of OHG. So how is this transfer of the property taxed?

In this case, one adds the holdings of the two property owners in OHG. The share of the property value that is to be used for the real estate transfer tax now incurred depends on this proportion. In other words, in this example, only 25 % of the property value is subject to the real estate transfer tax.

If, on the other hand, Ms. Casa were to hold a stake in OHG with the remaining 30%, the joint property would even be transferred to OHG 100% tax-free.

Transfer real estate from one partnership to another

Furthermore, we want to use the previous examples to also examine the tax consequences of transferring real estate from one partnership to another. We also assume that the same shareholders are involved in both partnerships.

4.1. Determination of real estate transfer tax for unequal shareholdings

Ms. Casa has recently acquired the remaining 25% of the stake in OHG, so that she and her husband now jointly run OHG. Furthermore, Mr. and Mrs. Casa have noticed that the customer car park is also used by other road users as a parking space. So they decide to start another company. This should also be a partnership, so that they decide on a limited partnership in which Mr. and Mrs. Casa are equally involved. For this, however, you need the property, which is owned by OHG as a customer parking space. Therefore, the spouses Casa now ask us about our assessment of the amount of the real estate transfer tax that would arise if the property were transferred from the OHG to the KG.

In this case, the answer is a little more complicated, because although the spouses Casa the two companies are jointly owned, the transfer of the property is by no means tax-free, as one might suspect at first. The shareholdings of the shareholders in the respective companies before and after the transfer must now be included in the calculation of the taxable share.

Mr. Casa holds a 70% and 50% stake in the acquiring limited partnership in the transferring OHG. This means that Mr Casa holds at least 50% of the shares in both companies. In the case of Ms Casa, the shareholding is 30 % in OHG and 50 % in KG, so that the common denominator in her case is 30 %. This results in a total tax exemption for the real estate transfer tax of 80 %.

4.2. The principle of ownership identity

Thus, in general, the transfer of real estate from a partnership to a sister partnership is exempt from real estate transfer tax to the extent that the shareholdings of a shareholder in the two companies are identical. This of course means that, apart from an identical shareholding in both partnerships, a shareholder always has to expect a shareholding tax if a property is transferred from a partnership to a sister company.

4.3. Application of the exemption from real estate transfer tax

The tax exemption from real estate transfer tax presented here applies both in the context of a sale and for all types of conversion, such as transfer or merger. The main thing, however, is that this is only possible with partnerships. A limited liability company, on the other hand, is excluded from this advantage as a separate legal entity.

To make the lender happy: show tax-free sales proceeds on the balance sheet

Apart from the previously described positive effects of the real estate transfer tax, which are possible when transferring real estate, the legal requirements can also be used consciously for your own benefit. This is about the fact that you can equip a person company, in which you are involved and which owns a property, with a higher balance sheet value, in order to have a better credit rating with lenders. Mr. and Mrs. Casa are now so friendly and show us how to achieve this:

5.1 Real estate transfer tax-free transfer of real estate between two sister companies

The property, which will in future be operated as a parking space by the limited partnership, is shown in the commercial balance sheet of OHG with a book value of EUR 100,000. Mr. and Mrs. Casa would now like to take out a loan to finance the expansion of their OHG. However, they realize that with a property that only shows EUR 100,000 in the books, they have little chance of success. The property actually has a market value of EUR 1,000,000. Therefore, Mr. and Mrs. Casa agree on the sale of the property from OHG to the KG. Finally, they now know that, due to their respective shareholdings in the transferring and acquiring companies, this is favoured by the real estate transfer tax. Thus, they achieve that the sale at a price of EUR 1,000,000 appears in the balance sheet of OHG with a book profit of EUR 900,000.

So they go to their lender, who lets the now significantly higher credit rating flow favorably into his decision to grant the loan.

What Mr. and Mrs. Casa disregarded, however, is that the sales profit achieved in the OHG is also important for their income tax. At the same time, however, they also benefit from a loss to the same extent by the limited partnership, so that the offsetting of profit and loss requires mutual neutralization. In other words: in the constellation presented here, the sale of the property has no effect on the income tax of Mr. and Mrs. Casa. However, at this point we would like to point out that in other circumstances this can still be associated with taxation.

5.2. The transfer of real estate between two sister companies without income tax

In fact, there is a possibility of transferring land between two sister companies without income tax. For this purpose, it is necessary that both companies develop only asset management activities. For pure real estate companies, there is no income tax in such an example. If at least one of the companies concerned is to be regarded as commercial, it is necessary in advance to carry out a commercial extraction.

This is usually the case, for example, at a GmbH & Co. KG. For this form of society is to be regarded as commercial in principle. But this can be changed by a commercial design, so that it also comes into the advantage of a tax-free transfer of real estate, as we have demonstrated to you here.

Finally, a short excursion on the question of the real estate transfer tax, which is incurred when a property is transferred from a partnership to one or more of the parties to it.

A few years later, the Casas decide to build a house. Renting out the limited partnership’s parking spaces has been declining recently and it looks like it will remain a business that yields little profit in the future. Since the property is also designated as building land, it is practically suitable for the construction of the house. The Casas therefore make the decision to dissolve the KG in order to reach the building plot. Before that, however, you want to find out from us which property transfer taxes you have to expect.

We advise you to apply the shareholding in the limited partnership also when transferring the property back to it. Because in this way they can transfer the property tax-free into their private assets. A different shareholding ratio would in turn result in a pro rata property transfer tax.

7th Lock Periods You Should Consider

In order to maintain and preserve the tax exemptions presented here, some details need to be considered. Thus, for the transfer of real estate from private assets to a collective holding, such as a partnership, a blocking period of five years must be adhered to. During this period after the transfer of the property, the shareholder’s shareholding must be at least as high as at the time of the transfer, otherwise the tax exemption will not apply. This blocking period also applies, of course, in the case of a transfer from one partnership to another partnership, provided that both shares are held by the same shareholder.

In addition, a five-year blocking period applies before the transfer if the partnership has been established by acquisition among living people. If this happened less than five years ago, the tax exemption also does not apply.