date | theme

11. June 2023 | Real estate within the family: Take advantage of tax advantages!

03. May 2019 | Immobilien-GmbH-Benefits for renting land

05. July 2019 | Founding a real estate company & children participating in real estate

10. July 2019 | Sell property to children: Save income and inheritance tax (this contribution)

annual rental income of the child | EUR | 50.000

annual depreciation of the property (2%) = annual payments to parents | EUR | -40,000

annual basic allowance of the child | EUR | -9.000

= taxable income of the child | EUR | 1,000

annual income tax of the child | EUR | -420

= Net profit of the child | EUR | 9,680

annual rental income of the child's GmbH | EUR | 50.000

annual depreciation of the property (3%) = annual payments to parents | EUR | -60,000

= annual loss of the child's GmbH | EUR | -10,000

Corporate tax and business tax of the child’s GmbH (simplified) | EUR | 0

taxable income of the child | EUR | 0

You save inheritance tax, gift tax, and income tax when you sell your properties to your children instead of inheriting or even giving them away. The sale is tax-free for you and your children have the decisive advantage that they can write off the purchase price again. Furthermore, the purchase of the property neither gift tax nor inheritance tax arise. In addition, there is no real estate transfer tax on such a sale. In addition, parents also derive various advantages from this procedure, by stipulating in the purchase contract that the purchase price is to be paid off as a claim in instalments, this can serve to secure the parents' retirement. We present these and other advantages as well as the associated framework conditions in our article.

If parents plan to transfer a property to their children, then it is generally assumed that this will be done within the framework of an inheritance. However, there are alternatives that include several tax advantages. One such alternative is to sell the property to the children.

Two different variants come into consideration. In the first option, the property is normally sold privately to the children. In the second model, the children set up a GmbH in advance of the sale. The parents then sell the property to the children’s GmbH in a second step. Both options lead to different tax advantages, but in order to be successful, some of them require different conditions.

We show you how you can combine your own financial security in old age with the transfer of the property to the children and at the same time contribute to the fact that your children do not have to pay gift tax or inheritance tax. On the basis of examples, we finally explain the two models.

2nd sale of a property to your own children

2.1. New depreciation upon purchase

The transfer of a property by gift or inheritance to your own children often takes place if the property is already completely written off. The children enter into the ownership of the property as legal successors of their parents. However, this also means that they cannot reclaim the right to depreciation.

When buying a property, on the other hand, the buyer can take into account the total acquisition costs in the depreciation. Children can also use this advantage, but only if they buy the property instead of inheriting it or receiving it as a gift.

2.2. Lower income tax on children

The rental income, which now comes to the children after the sale of the property, is of course to be set at their income tax. However, the amount of income tax also depends on other income of the children. However, if the children do not earn any other income, for example due to their minority, then the taxable income from the rental income is reduced by the annual basic allowance. This currently amounts to around EUR 9,000. In addition, each child can use a basic allowance. For three children, around EUR 27,000 would be tax-free!

2.3. Tax-free sale by parents to children

For parents, the sales profit would normally cause a burden on income tax. However, since we assume that the property is already depreciated, a period of more than ten years has passed since its acquisition by the parents. In this usual case, the sale of the property takes place tax-free due to the elapsed ten-year speculative period. In addition, there are also other criteria that can lead to a tax-free sale.

Furthermore, the sale of a property by parents to their children is exempt from the property transfer tax. This also helps to save a lot of money.

2.4 Settlement of the selling price via depreciation instalments

In the purchase contract, it can also be specified that the remuneration takes place as a claim of the parents to the children. This claim can be paid in instalments corresponding to the children's tax savings through depreciation. Since the depreciation depends on the acquisition costs, at the end of the period of depreciation, the claim of the parents is basically paid. Thus, one avoids a real additional expense for the children, at the same time generates a regular income for the parents, which basically corresponds to the repayment of an interest-free loan. They must therefore be regarded as tax-free. In this context, it is basically also irrelevant at which agreed selling price the sale of the property takes place. Nevertheless, the purchase price should be chosen wisely.

2.5. Financial protection of parents over the purchase price claim

2.5.1. Payment of the purchase price claim in regular instalments

These regular incomes of parents are ideal for securing their retirement. Ideally, however, an accumulation of new assets should be avoided. If this were to happen nevertheless, the children might be subject to inheritance tax. However, such a case can be avoided by clever advance planning. This is achieved by predetermining the periodic payments over the purchase price and thus over the depreciation in such a way that they at least correspond to the expected cost of living of the parents during the same period. In addition, a certain amount of savings can also be included in the installments as a precautionary measure. However, it may at most lead to the fact that the amount saved by the parents is still lower at the end of the allowance for the inheritance tax of the children.

2.5.2. Payment of the purchase price claim in the form of pensions

The above-described model for the financial protection of parents seems to cover all contingencies, except for three, namely either the final payment of the purchase price claim during the lifetime of the parents or their premature death or that of the children.

If the parents are still living at the time of the last installment payment, their financial security ends via this model. However, an option that ensures financial security until the actual end of life is desirable.

If, on the other hand, the parents die before their claim is paid, they inherit the claim to the children. In the case of inheritance tax, this is relevant because this also triggers taxation. So you have to find a way to prevent the children from having to pay inheritance tax on the claim in the estate of the parents.

In fact, this is possible by agreeing on a regular payment in the form of an annuity instead of an installment payment according to the above model. The procedure is to determine a capital value over the statistically average life expectancy of the parents. The net present value is thus determined by the purchase price of the property depending on the age of the parents. This capital value is then used in the purchase contract as a fee for the property.

The children thus undertake to pay a kind of pension to the parents. At the same time, parents are financially secure until their actual end of life. In addition, parents save the income tax that would apply to a regular pension. And of course, the children also benefit from the fact that they can use both a new depreciation of the property and that they avoid taxation under the gift tax or inheritance tax. If the capital value is paid off, all further installments can even be set as additional acquisition costs for the children.

2.5.3. Selling real estate to children: our expertise

2.6 Consequences of premature death of children

It remains to be clarified whether precautionary measures can also be taken to counter a possible death of the children.

If the children have their own descendants, they can legally follow in the footsteps of the parents in the case of inheritance. As legal successors, they would then continue to meet the requirements of the grandparents.

However, in this case there would also be an inheritance tax on the grandchildren. After all, the grandchildren can compare the remaining claim of the grandparents as an estate liability to the asset of the property. In the most favorable tax case, the asset of the property remains below the tax allowance of the grandchildren. In addition, the inheritance tax for children falls into the most favourable tax category I. The tax rate in this case is a maximum of 30%. At the same time, however, the law also provides for a tax exemption of EUR 400,000.

However, if the parents are the only heirs of the prematurely deceased children, then they would inherit the property from their children. In this situation, a certain amount of compensation must also be sought by offsetting the remaining purchase price claim on the property asset at the time of inheritance tax. In the most favourable tax case, this also leads to the difference to be taxed being smaller than the allowance for inheritance tax. However, both the tax bracket and the tax allowance for inheritance tax are relatively unfavourable for such an inheritance of the children to their own parents. We are also happy to advise you personally on this.

Similar to the private sale, the sale to a GmbH of the children leads to a renewed approach to depreciation. If the property is an object that provides for commercial use instead of use for residential purposes and if the tenant is a trader, the annual depreciation is even 3% instead of only 2% of the acquisition cost. In the case of such a property, the acquisition costs are often so high that the payment of the purchase price claim via the depreciation to the parents can take place in larger installments. However, the duration until full depreciation is shortened from regular 50 to about 33 years.

Again, it should be ensured that this can lead to the parents building up a new fortune, which causes an inheritance tax on the children.

Furthermore, it should be noted that the sale of the property to the children’s GmbH is not exempt from the real estate transfer tax. In addition, a GmbH cannot hold the subsequent sale tax-free, even after the expiry of the speculative period of ten years. These two conditions in particular mean that private sale to children is usually the better alternative.

4th Computational Examples

In both examples we assume the following assumptions and some simplifications: