The usufruct is a legal claim in a thing in which other persons have rights. In the case of gifts and inheritances, this is a matter that is also important in tax matters. It is therefore obvious that usufruct offers possibilities for tax structuring in the gift tax. Two different types can be used. While the reserved usufruct of the donor secures a part of the rights in the transferred object and thus reserves it to him, the use of the grant is the opposite. In the case of the benefit usage, the actual property right remains with the donor and only a part of the rights is transferred to the gifted person.

As opposite as these two concepts are, so different are their tax effects in the gift tax. In this context, the conditional usufruct is of tax advantage, in particular in the case of the transfer of real estate from parents to their children, whereas the benefit usufruct is rare.

In the video, we explain how you can minimize your taxes in the case of a gift by using the reserved usufruct.

1. The meaning of the term usufruct

1.1. The usufruct as a right of use

The usufruct is to be understood as a right of use. In doing so, it grants the person who has this right a limited power of disposal in a matter. Either the right of ownership of the object can exist with another person than with the person who has the right of use. This is the case under the conditional right. Or else the ownership relationship remains, while the rights of use in this thing pass to another person. Then this is called a benefit.

1.2 usufruct of real estate in relation to gift tax

In our article we would like to focus primarily on the connections of usufruct in the gifting of real estate. In this context, we are particularly interested in the facts when real estate is transferred to children. This is because considerable tax advantages are to be expected. And the sooner you apply this tax design, the greater the tax advantage turns out at the end. However, other applications of usufruct are also possible. Instead of usufruct on a property, for example, usufruct on the income of a company or securities is also conceivable. However, the conditional usufruct is usually the most important component in taxing a gift of real estate, especially when real estate is transferred to children.

2. Legal aspects of usufruct in gifts

The usufruct can lead to tax effects both as a reserved usufruct and as a grant usufruct in the context of a gift. Because the value of a thing also depends on the extent of rights that the owner has in this thing. For example, if a person acquires large lands without also obtaining the rights to use the mineral resources hidden there, then it may happen that later found mineral resources are worthless for him, because he himself then does not profit from them; He lacks the right to do so.

This is also the case when gifting a property or transferring the rights of use to it. In the case of reserved usufruct, there is a transfer of ownership of the property, at the same time the donor retains some rights to the property for himself. Usually this is the right to claim all future rental income. A right of residence can also be the subject of a reserved usufruct. On the other hand, the grant beneficiary of the gifted person grants certain rights of use, while the gifting person retains the ownership of the property. In both cases, the transfer of rights leads to a depreciation of the property. Consequently, this also leads to tax consequences.

Incidentally, such ancillary rights can be registered in the land register in addition to the right of ownership of a property. This way you can find out which person has the corresponding rights.

Now we look at how a reserved usufruct in the gift of a property leads to a tax advantage. The determination of the impairment due to usufruct is of crucial importance. For this purpose, the law provides for a calculation which quantifies this reduction as a net present value. The present value is to be regarded as a kind of time equivalent. Thus, one calculates with the capital value what is the benefit which the beneficiary of usufruct has to expect in the course of his life. For this purpose, the average life expectancy of men and women in Germany is based on the age of the donor. To explain this complex procedure in simple terms, we take the two extremes of a young and an older giver as examples.

Determination of the net present value of a usufruct in a younger person

A twenty-year-old person who transfers a property but wishes to continue to enjoy the right to the rental income of the property can continue to benefit from this rental income for at least 50 years on average due to his statistical life expectancy. The new owner, on the other hand, misses all this considerable rental income. Thus, when assessing the gift tax, he can refer to the property value reduced by the net present value of the usufruct. Therefore, the gift tax is either much lower than if the property had been transferred with all rights. Or it is ideally eliminated altogether, because the basic allowance is higher than the value of the gift.

3.2. Determination of the net present value of a usufruct in an elderly person

Obviously, the opposite case in which an elderly person makes the gift of the property is associated with a low capital value. For example, at the age of 70, from a statistical point of view, a person can only enjoy rental income for a few years. Consequently, only a small reduction in the property value can be expected when calculating the gift tax. Thus, the gift tax is also correspondingly high.

4. The benefit usage

Let us now consider the tax aspects of the grant usufruct in relation to the gift of a property. In this case, the person who receives the rental income through the grant usufruct has to tax this income in full. Since ownership of the property remains with the donor, the right to depreciate the property is also in his hands instead of in the hands of the recipient of the usufruct. Therefore, this excludes the possibility of using depreciation to reduce income from renting and leasing. On the other hand, the owner has no possibility to set the depreciation in his income tax, because this can only be set in the presence of the associated rental income.

Therefore, the beneficiary benefit is at most in very special situations associated with a possible tax advantage. In most cases, however, this is not recommended.

5 Use of the reserved usage for the gift

5.1. Reserved usufruct: Tax advantages in the case of parental income tax

So the classical use of the reserved usufruct lies in cases where parents transfer real estate to children by gift. Significant tax advantages are possible. Especially in the case of an early transfer of ownership to the children, in addition to the tax savings in the gift tax, further positive effects in the income tax of the parents are to be expected. Although the children take the legal succession of the property rights to the property through the gift, the parents continue to earn the rental income. Therefore, they are entitled to make the depreciation. However, the prerequisite is that the parents have incurred when purchasing the property and possibly also subsequent acquisition costs.

5.2. An example of the enormous savings potential of the reserved usufruct

The extent to which the tax advantage can be obtained by using the conditional right is illustrated by the following example: The parents of three children have a property of EUR 8,000,000 and would like to transfer it to their children. We expect a realistic net present value of the reserved beneficiary of 60% of the property value. In this way, the reserved usufruct reduces the value of the enrichment that is relevant for the gift tax to EUR 3,200,000. Consequently, each child has to pay tax on a gift of EUR 533.333. Of this, the basic allowance of EUR 400,000 per child is deducted, so that ultimately only EUR 133,000 with a tax rate of 11% is taxable. Therefore, there is a gift tax of only EUR 15,000 per child and parent. If you now consider the total tax burden of EUR 90,000 in relation to the value of the transferred property, you can see that despite the considerable property value, only 1% of taxes are incurred.

The comparison is even more impressive, however, considering that with this family constellation a gift tax has to be paid even from a real estate value of EUR 2,000.001. So you can see that even an excess of EUR 6,000,000 hardly increases the tax burden.

Transfer real estate to children: sale instead of gift

However, the gift of a property to your own children is in many cases only the second best choice to transfer a property to children. Alternatively, you can also sell the property to the children. The purchase price is to be designed as a loan. Nevertheless, this is then considered as the acquisition cost of the property for the children. And thus, the children achieve both the rental income and the advantage of using the complete acquisition costs as depreciation when reducing their rental income. If the children are still minors or are still at school or in education, then a basic allowance of about EUR 9,000 can be deducted from the total income – per child. Furthermore, anything beyond this allowance is subject to a low tax rate, so that the children incur significantly less taxes than if their parents had to tax this income themselves.

At the same time, the repayment of the acquisition costs serves the parents as financial security in old age – tax-free. Because a repayment is excluded as income in the taxation of income. In addition, the sale of real estate among straight line relatives is exempt from the real estate transfer tax. This tax therefore does not constitute an obstacle in this model for the control design.