Normally, the income earned on a private sale is subject to income tax. This also applies, among other things, to the profit from the sale of a property (for example, a detached house or condominium). However, few property owners know that a tax-free home sale is also possible under certain conditions. In this article, we highlight the exceptions that exist in this context and point out ways to sell real estate tax-free.

The legislature has made the following simple regulation: As soon as a period of at least 10 years has elapsed between the purchase and sale of a property, the sales proceeds obtained remain exempt from taxation.

This 10-year period is the general measure of the tax offices to assess whether there is a speculative purchase and therefore a so-called speculative tax is to be levied. From a tax point of view, the speculative profit is defined as other income from a private sale transaction (§ 23 in the V.V.m. § 22 No. 2 EStG). This is to prevent people from constantly enriching themselves on a private basis tax-free through real estate speculation, which would basically be nothing other than a profit from capital assets – and this is after all anything but tax-free. On the other hand, a real estate agent who operates this commercially is also taxable. Therefore: equal right – and equal duty – for all.

Sell property tax-free for own use

In the above case, we considered the tax-free sale of a property owned by the seller for more than ten years in general. So it does not matter whether the seller rented out his house or his condominium in the ten years, lived in it or even left it vacant. However, if such a property has been used for own residential purposes, other, less strict rules apply. It should only be noted that the condition – use for own residential purposes – is fulfilled in the year of sale as well as in the two previous years. This is even the case if the total duration of own use is less than 36 months. However, the use must have been continuous within this period.

An example:

Mr. Schlau acquired a single-family house in December 2001, which he moved into the same month. However, he decides to sell it again soon. In January 2003 the time has come: he moves out and completes the sale a month later. He does not have to tax the profit made here, because he has complied with the legal requirements for tax exemption – own use in the year of the sale and in the two previous years.

By the way, this regulation also applies to holiday apartments that were in own use over the required period. However, an intermediate rental is, as the expert would say, harmful. Further special features in the sale of real estate are given in the case of divorce or separated spouses.

In addition, the sale of a property is also considered tax-free if the owners use it exclusively for their own residential purposes from the beginning. In our previous example, Mr. Schlau could have sold it tax-free under this rule anyway, because he lived in it from the beginning. In addition to the 10-year period and the regulation with the three years of own use, this regulation also leads to a tax-free sale of residential property.

Selling property tax-free: own use also applies to children

3.1. If the child lives in the residential property

The own use of a property also exists if instead of the owner his child meets this condition. In this case, he must have a right to child benefit or to a child allowance for this child over the entire period of use to be taken into account. Furthermore, it should be noted that the transfer of the living space to the child must take place free of charge.

A self-use of residential property also exists if several properties are available and one child lives in each under the above conditions. Own use is also considered if the owner lives in one of the properties and his child in another. Here, therefore, all possible combinations in terms of taxation of a sale of real estate are treated in the same way.

3.2. Opportunities for tax-free real estate sale via a family company

In this context, the possibility of starting a family company is also worth considering. For example, a family company can be founded as GbR, GmbH or GmbH & Co. KG with the aim of holding and managing its own property. In other words, all family members involved in the company are co-owners of the real estate assets. One of the many advantages of such a family company is the tax-free transfer of, for example, a real estate inheritance to your own children.

Since we have partly moved on to an entrepreneurial view here, the following excursion may also be interesting: A tax-free real estate sale is also possible under certain circumstances at an OHG or GmbH & Co. KG. It must be noted that a so-called commercial stamp of a GmbH & Co. KG or avoid commercial infection of an OHG. This prevents the tax office from considering such a company, which is in principle a commercial company, as a trade and treating it accordingly for tax purposes.

Since this is obviously a complex subject a little beyond the main topic, it is advisable to discuss it with one of our experts if necessary.

Another special feature is when an undeveloped plot of land has been acquired, on which a house is subsequently built, and this is then used itself, as described in the aforementioned cases. If the three-year rule for own use for residential purposes is also complied with in this case, the share of profit that would be attributable to land when selling a house will also remain exempt from tax.

5.Sell inherited/gifted property tax-free

Anyone who becomes the owner of a property by inheritance or donation should contact a lawyer before a planned sale. Legal and tax consultants provide comprehensive information about the many provisions in this context. For example, both inheritance and gift are not considered an acquisition, because this took place when purchased by the decedent or previous owner. The actual purchase can thus be significantly longer than ten years ago, which may consequently lead to the tax-free sale of the property by the beneficiary. Of course, this also applies if the previous owner owned the properties for less than ten years, but used the property himself in the three years before the inheritance or before the donation.

By the way: through well-considered donations you can generate considerable tax advantages for the beneficiary. So if you intend to settle your estate for the benefit of your heirs, you should also think about a gift as an alternative to inheritance at an early stage. We are happy to advise you.

6. Tax exemption on the sale of real estate from former assets

Instead of a purchase of a residential property, the transfer of such a residential unit previously in business assets is also considered an acquisition, even if the operation is discontinued. If such a property is subsequently to be sold by private, the already mentioned exceptions apply here again in order to keep the sales proceeds tax-free.

An example:

Mr. Smart runs a restaurant. In order to offer his chef a cheap accommodation, he bought an apartment in the same building together with the restaurant in 1997. He leased this to his employee until November 2001. In November 2001, Mr. Smart decides to end his business due to age reasons. He sells the restaurant, but not the now vacant employee apartment, in which he moves in December 2001. Since he is well and he travels a lot, he does not actually need this apartment. At the end of January 2003, the condominium was sold, from which he moved at the beginning of the month.

Also in this example, the sale of the condominium is tax-free, because the condition of use for own residential purposes is fulfilled in the year of the sale and in the two previous years.

In addition, there are clever design variants for selling real estate tied to business assets tax-free. Here it is particularly appropriate to consider the formation of a reserve according to § 6b EStG. Similarly, there are various strategies for avoiding commercial property trading.

7th to sell property tax-free – Speculation buying is harmless

To refer again to the speculative purchase mentioned at the beginning: Even if the tax office legitimately assumes that you acquire a property with a speculative intention, it is obliged to recognize the tax exemption of one of the situations described here (for example, in the 3-year period). A tax-free sale of residential property is thus also given in this case.

8th to sell property tax-free – Historical background