The property swing is a design model with which spouses can transfer assets to each other without this triggering a gift tax. The focus is on the community of gain as a prerequisite for the property swing. Thus, a spouse can only transfer property to the other partner tax-free if his or her acquired property is greater than that of the partner. The transfer of the difference between the two asset gains is only possible via the property swing if the community of gains comes to an end. This can also be done with the involvement of a notary. This brings about a balance of the added value of the spouses. But the new decision to reintroduce a community of added value also requires a notary. That this may also happen shortly afterwards, without this representing an abuse of design according to § 42 AO, even confirmed the Federal Finance Court. In this way, however, it is also possible to design the amount of the inheritance tax and of compulsory parts in the case of inheritance by other entitled persons.

Property regime swing: Tax-free gift between spouses

1st property swing: alternative to gifting among spouses

If you want to transfer property to someone, then this is possible in principle in two ways: as a gift among living people or as an inheritance. In both cases, this constitutes a taxable transaction in the sense of tax law, since a transfer of assets takes place without consideration. Although in such a case, allowances can also be used to a certain extent, their amount depends, among other things, on the degree of kinship and the size of the property in question and the period within which its transfer takes place.

As an alternative to donation, the design model Güterstandsschwkel was developed. This is about the tax-optimized transfer of assets between spouses. The basic idea is that you can transfer assets without the financial administration considering the assets as an inheritance or gift.

2nd property swing: legal basis

2.1. Community of benefits as a prerequisite for the property swing

The legislator deliberately created the legal framework for this. It is enshrined in § 5 ErbStG and regulates the exception that arises from the compensation of a property regime of the community. Because the prerequisite here is defined as compensation of a property regime of the community of added profit. It is irrelevant whether the transfer of the property takes place among living or within the framework of an inheritance.

2.2. Property regime of the community

The legal relationship of spouses in relation to their assets can be designed in different ways. On the one hand, a strict separation of assets is conceivable. However, the reference framework required for the property swing provides otherwise. For the property regime of the community of gain represents a compensation of the acquired assets of the spouses. If one spouse generates more wealth than the other, then the property regime of the community of gains makes it mutually obligatory to compensate for this difference. In the end, this should lead to both spouses being able to have equal assets.

An example: Mr. and Mrs. Treu marry, but bring no assets into the marriage. For them, the property regime of the community of profits exists. However, while Mr. Treu as a small business owner earns an annual net income of only EUR 30,000, Ms. Treu contributes to the common wealth with an annual net income of EUR 130,000. If one now dissolves the property status of the community after a year of marriage, then Mr. Treu is entitled to half the difference between their two gains:

EUR 130,000 – EUR 30,000 = EUR 100,000

EUR 100,000 / 2 = EUR 50,000

In order to meet the claim for compensation of the acquired property of her husband, Mrs. Treu transfers him the amount of EUR 50,000. Finally, both spouses have assets of EUR 80,000 each.

2.3. Community for profit is the standard case for spouses

In this regard, it should be noted that, in principle, the property regime of the community is always applicable. Only by contractual amendment can spouses change to another property regime. This requires notarization. But of course, the partners can also agree on a different property status by marriage contract before the marriage.

Now let’s get to practice. As already explained, the property regime of the community is the prerequisite for implementing the design model of the property regime swing. Now in order to balance the difference between the gains of the spouses, they go to their notary. There, they agree contractually on the change from the property regime of the community to the separation of property. Due to this circumstance, the one spouse is now entitled to compensation for the assets acquired by the two partners since the beginning of the existence of the community. Since this is neither a gift nor an inheritance in the sense of tax law according to § 5 ErbStG, this transfer of the property remains without tax consequences. Subsequently, the spouses can again make a change in their property regime in order to re-establish a community of gains.

4. The 4 advantages of the property swing

4.1. Tax-free transfer of assets

The first and probably most interesting advantage of the property regime swing is fiscal in nature. Because this gives spouses a possibility to transfer assets from one partner to another without having to pay gift tax or inheritance tax.

Normally, in the case of a gift or inheritance, only a limited allowance of EUR 500,000 would reduce the tax base. In addition, this allowance is also applicable on a temporary basis. Because the renewal of the allowance takes 10 years. So a simple gift in the reallocation of larger assets is associated with a taxation that can easily be avoided with the property swing.

4.2. Further tax advantages in the case of gifts and inheritance

However, the property swing also offers the opportunity to generate tax benefits indirectly. This also concerns gift tax or inheritance tax. Thus, the reallocation of property between the spouses offers the possibility that they themselves can transfer less property to their children or grandchildren through gift or inheritance. What sounds like a disadvantage at first – After all, the descendants receive less instead of, as usually hoped, more – has the advantage that they can then use their allowance more efficiently. In the best case, the children or grandchildren can also completely avoid the otherwise incurred gift tax or inheritance tax. So basically this is a combination with the tax saving model of chain yawning.

4.3. Shorter challenge period for insolvency law

The reallocation of assets by the property swing, as it occurs by the termination of the community of gains, is an angelic legal claim. If the spouse, who has to carry out the settlement of the property, now comes into a situation in which creditors also declare an interest in his property through insolvency, then this legal claim is quite relevant. In fact, unlike a gift, which constitutes a free transaction, the countervailing period for compensation for compensation is reduced due to the termination of the joint venture. For example, the challenge period for a transfer of assets to a related party for a fee pursuant to § 133 (4) InsO is only two years, whereas it is twice as long for a free transaction pursuant to § 143 (1) InsO.

4.4. Reduction of the right of other beneficiaries

It is also possible to use the property regime swing in inheritance law. If the spouse with the greater added value has a potential heir who is entitled to a certain compulsory share in an inheritance, then the property swing is a means to reduce this compulsory share if necessary. Because by reallocating the property by compensating the additional profit, the decedent now has less property than if he had agreed with the spouse a separation of property.

Inheritance & Gift Tax reduced to 0%

5th BFH judgment: property swing is not an abuse of design

Of course, the property swing represents a design model that can easily be used to legally generate tax advantages. After all, the property swing offers spouses the opportunity to transfer property without a gift tax or inheritance tax. So the question is also justified whether the property regime swing in this respect may constitute an abuse of design within the meaning of § 42 AO. In particular, the fact that, after the abolition of the community of profits and the associated transfer of the overhang, the spouses can re-establish a community of profits is usually a purely tax-motivated act from the point of view of the tax administration.

It is therefore hardly surprising that the property swing was also the subject of legal disputes in court. In fact, the Bundesfinanzhof ruled in the highest instance on a case in which, on the same day, the termination of the joint venture, the subsequent reallocation of assets and the re-establishment of a joint venture took place. But to the surprise of most experts, the judges found that this was by no means an abuse of design.