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1. March 2021 | Acquire and renovate protected property – 6 tax benefits

6 October 2021 | Immobilien-GmbH vs. Privatperson – tax optimization when buying real estate

November 2, 2021 | Private sale business after free transfer: How to save taxes!

10. December 2021 | Taxation of commercial real estate – 3 tax advantages

23. December 2021 | Real estate sale after divorce or with separated spouses – Attention tax trap! (this contribution)

The sale of real estate after a divorce can become a tax trap, although the sale of a property used exclusively for own residential purposes is generally tax-free. This risk affects the dependent spouse and also applies to spouses living separately. We explain how this comes about and how you can prevent this tax trap.

To be able to sell a property tax-free, it must be a private sale transaction. Thus, the sale is tax-free if the property was previously used by the owner exclusively for his own residential purposes pursuant to § 23 (1) sentence 1 number 1 sentence 3 EStG or if the property was used for his own residential purposes at least in the year of the sale and in the second year before the sale at least one day and in the year before the sale for a full twelve months (§ 23 (2) sentence 1 number 1 sentence 3 alternative 2 EStG).

However, the sale of real estate after a divorce can turn out to be a tax trap for the spouse who leaves half of his home to the other under a maintenance obligation. Although the property was used exclusively for own residential purposes from the time of purchase, if the holding period of ten years is undercut, the tax exemption threatens. As a result, the dependent spouse has to pay tax on the sale price. This risk affects not only divorced spouses, but also separated spouses. Therefore, the central question in a property sale after a divorce is whether the sale of the property constitutes a private sale transaction.

The starting point: The dependent spouse lives extensively in the house and has been given half of the house by the undercut spouse to fulfill the maintenance obligation. Since the dependent spouse continues to live in the house, he uses the half of the house due to him exclusively for his own residential purposes. Therefore, there is no private sale transaction for this spouse. Consequently, the capital gain from the house would not be taxable even if sold within the ten-year period.

The problem is the assessment of the sale transaction for the dependent spouse. The dependent spouse no longer uses the house for his own residential purposes due to half the transfer to the other spouse. As a result, if the sale took place within 10 years of the purchase, the capital gain is taxable as a private sale transaction.

The spouse cannot object that, for example, the sale is based on a predicament. The reason why a property is sold within ten years does not play a role in the assessment of whether a private sale transaction is carried out pursuant to § 23 (1) sentence 1 number 1 EStG.

However, it seems questionable whether the dependent spouse does not use the house for residential purposes if his own child still lives there with the other spouse. On the other hand, however, it speaks that he does not use it for his own living purposes. The wording therefore suggests that the taxpayer himself must live there. In addition, the ex-spouse also lives in the house. Therefore, even if one acknowledges that the use of the child is equivalent to one's own use, the house is not considered to be sole residential use, but also used to accommodate the ex-spouse. This argument is therefore also obsolete. The dependent spouse must thus tax the capital gain from his half share.

It should be noted, however, that such a situation currently lies with the Bundesfinanzhof. Whether it actually remains with the taxation, must therefore still be decided by the Federal Finance Court. Nevertheless, you should be prepared for the fact that a taxation of the capital gain is possible and the financial administration currently assumes.

But there are simple ways you can avoid taxing capital gains. It is best to sell the property only after the ten-year period. Then it is not significant whether you used the house for residential purposes. This is therefore the surest way to counteract the taxation of capital gains.

Another conceivable possibility would be to sell the house immediately in the year of the dependent spouse’s departure. It is sufficient that in the year of sale the house was used for own living purposes on at least one day. It would therefore be possible to sell the share of the house to the spouses living there.

But you should not rely on getting the house sold on time. Rather, we advise you to keep the first option as security in mind. It may be that you cannot find a buyer for the house and thus can sell the house too late or possibly have to sell it under value. That would be very ungrateful. You should therefore necessarily keep the first option open. In an absolute emergency, you can reduce the tax burden by transferring your share of the house to your child free of charge and the house is only sold afterwards. In this way, you may achieve a certain progression effect.

But you should never move headlessly out of the house and sell it. This threatens a considerable tax burden!

Although it has not yet been clarified by the highest court whether the dependent spouse actually has to tax the capital gain. However, you should include the possibility of taxation in your consideration. This post shows you ways to keep the capital gain tax-free. At this point, however, we would also like to point out that in the event of a divorce, a severance payment regulated by a marriage contract can remain tax-free.