Property owners who want to sell their properties often wonder whether their property sale is commercial or asset management. Three cases must be distinguished. On the one hand, you have to consider the property sale of a single person. Then the real estate sales of partnerships and corporations also require an assessment. In all three cases, depending on the respective circumstances, a property sale can be treated as an asset manager or considered commercial. This can even lead to the fact that previously asset-management treated real estate in the future as commercial objects. In fact, there can even be a retroactive reassignment of already sold properties, so that they have to be subsequently taxed as commercial.

1st sale of real estate: commercial or asset management – Introduction

If you have several properties, you can earn rental income as well as profits from the sale. Similarly, the tax law is also designed to make a distinction in the sale of real estate on the basis of these principles. Thus, the sale of real estate of a property previously held in asset management is taxable differently than in a purely commercially intended sale. Because if there is a commercial real estate sale, you have to deal with a commercial company, which in turn is subject to trade tax. Basically, then there is no difference to a bicycle or car dealer: you buy and sell objects to make profits. The profit-making intention is an essential feature of commercial enterprises.

And yet the real estate thing is a little more complex. Depending on the type of asset management, this can be a borderline case for business. So how do you distinguish between a real estate sale under asset management and a commercial sale? We are giving an answer here.

Real Estate Sale: Individual vs. Person vs. Capital company

It would be nice if we could answer this question in general. However, one must distinguish whether the seller is an individual, a partnership or a corporation (the latter case should also include foundations and cooperatives). Therefore, we will answer separately in three separate sections.

Just so much in advance: no matter what the case is, you should be aware of the potential tax implications in any real estate sale. If you want advice on this, you will of course find the right contact person in our office.

3rd sale of real estate by an individual

If you as an individual have several properties and want to sell one of the objects, you regularly assume that the resulting profit is to be treated as other income for tax purposes (§ 23 in conjunction with § 22 no. 2 EStG). However, this is only the case if the property to be sold has previously been held in asset management. Because if you constantly buy real estate in order to sell it profitably as soon as possible, then this represents commercial real estate trade. And this is subject to other taxation rules, namely those according to § 15 EStG. In principle, however, the property sale takes place in asset management after a holding period of ten years.

3.1. The three-object limit when selling real estate

You have to consider how often you sell property within five years. If you do this three times, then these divestments are usually regarded as occasional transactions. A transfer to a partnership or corporation is equivalent to a sale. However, if you carry out such a property sale four or more times within a period of five years, the tax office assumes that this already falls into the commercial sector. This regulation is referred to in tax law as a three-object limit.

However, even a fourth or further property sale after more than five years can raise the suspicion that it is commercial. However, this must be based on the exact circumstances. In particular, a planned approach could underpin the assumption of a commercial real estate sale.

3.2. Other circumstances that characterize a commercial sale of real estate

In addition, other circumstances may be decisive. If you purchase a property and renovate or rebuild it in such a way that it should please an already interested buyer and perhaps even persuade him to buy, then the sale in order to achieve a profit is clearly visible here. Whether a rental takes place in between is irrelevant. Basically, in such a case, one acts like a builder or developer who offers his own real estate objects for sale.

Speaking of builders, those who work in the construction industry and sell real estate can expect their or his real estate sales to be viewed more critically by the tax office. Under certain circumstances, there may even be a commercial real estate sale, although the three-object limit has been adhered to.

3.3. No infection by commercial property sale to individuals

However, the commercial sale of real estate applies only to those objects to which these special features apply. If there are still other real estate stocks that are actually held in asset management, then the commercial real estate sale does not in any way degrade to the remaining real estate assets under management. Finally, a bicycle dealer can also sell his private bike without this also being attributable to his trade.

The decisive factor is therefore the intention with which one acquires the properties. If you plan to hold a property for the longer term from the beginning, the suspicion of a later commercial real estate sale is unfounded.

If, however, a fourth or further property is actually sold in the five-year period of the three-object boundary, then the three properties sold in the previous five-year period are also deemed to be sold commercially. Thus, a retroactive taxation takes place for these objects as a business profit.

3.4. Information that speaks for asset management objectives in the acquisition of real estate

But how is the Treasury to tell the difference between a property sold under asset management and one where a commercial property sale takes place? Well, for example, the conditions of a debt financing can serve. Because if the term of a loan corresponds approximately to the ten-year speculative period, then the tax office must also acknowledge that a longer-term asset management is intended here. Even if you sell this property prematurely, this does not represent a commercial real estate sale, provided you observe the previously described three-object limit.

Another circumstance that speaks for an asset management activity in connection with the sale of real estate can be considered if one acquires a residential property and leases it over a period of more than five years. Even if you have to sell such a property due to special circumstances by exceeding the three-object limit, this is by no means considered commercial. As a special circumstance, for example, a professionally initiated relocation or a financial imbalance comes into question.

In addition, in the case of a real estate sale in which no substantial profit is incurred, it can be assumed that there is no commercial event.

3.5. Sale of property obtained free of charge

Another point: If one acquires real estate by way of inheritance, then one can sell the real estate under certain conditions in any number within the five-year period, without this being considered a commercial real estate sale.

However, if the decedent already operated a commercial real estate trade, then of course you automatically inherit a commercial business. Therefore, the subsequent real estate sales are usually also to be regarded as commercial, unless one shows by active measures a change in the field of asset management.

Similarly complex is the matter in the sale of real estate objects that have been obtained free of charge, i.e. by anticipation of succession or donation.

3.6 Separate consideration of spouses

By the way, the assessment of property sales of spouses is always separate. This means, for example, that everyone can manage three real estate sales under the three-object limit without running the risk of being considered commercial.

4th sale of real estate by a partnership

In the previous chapter we pointed out that a commercial real estate sale of an individual does not in any way mean that all his other property held by asset management will in future also face a commercially inked sale. And that's what we've addressed for good reason. For a partnership, this is different. Because here lurks the danger of a so-called commercial infection.

Sure, even a partnership, be it a GbR, OHG, KG or a GmbH & Co. KG, can acquire, hold and sell real estate in an asset management manner. The taxation of profits from a sale of real estate is then carried out at the shareholder level. But as soon as even a single property changes hands as part of a sale that is considered commercial, this tears the company with its entire real estate stock into commerciality. No wonder, then, that one speaks of a commercial infection. Likewise, the properties sold in the five previous years are also considered to have been sold commercially. A re-taxation as income from business operations is thus the logical consequence.

What also requires a differentiated consideration is the sale of real estate within the framework of the three-object limit by a partnership, if a shareholder has acquired the property to be sold shortly before the transfer to the company. If the period between the acquisition of the property by the shareholder and the sale by the company is less than five years and the three-object limit is exceeded, this sale of the property is to be regarded as commercial.

5th sale of real estate by a corporation

If the infection of a commercial real estate sale can affect the real estate portfolio of a partnership that has been held under asset management, what about a corporation? Not surprisingly, very similar. Although a corporation as a legal person should be treated as a taxable person with a single natural person as a property owner, infection by commercial sale of real estate is also possible in its case. In particular, if you want to use the extended land reduction pursuant to § 9 GewStG, you should keep all activities of the company in the asset management sector. A commercial real estate sale is therefore also harmful for a corporation.

Real estate sale: commercial or asset management? Our conclusion

Much more could be written about the distinction between a commercial and an asset management property sale. However, the last lines of this article should also contain some solutions that in partnerships and corporations equally bring about the exclusion of commercial infection. If you ensure that a company operates exclusively in asset management and a second company is responsible for the commercial real estate trade, then you have shielded both areas sufficiently from each other to exclude commercial infection. For example, a holding structure with several real estate companies as subsidiaries can be helpful. In any case, there are countless possibilities and opportunities here.

As you can see, beyond the pure expertise, we also have the creativity with which we successfully design taxes in the field of real estate tax law. But we can only achieve this before the foundations for taxation have been laid. Taxation is generally a forward-looking measure.