For many wealthy people in Germany, it is a long-term goal to transfer real estate assets as tax-free as possible. You can use a whole range of designs. Among other things, one can try to design the transfer in such a way that one resorts to the legally offered protection regulations. There are two alternatives here, based on the amount of the asset. For assets above a value of EUR 26 million, different conditions must be met than for smaller assets. Moreover, these relief schemes apply essentially only to operating assets. And yet here we show how we can apply these benefits to real estate assets.

1. Transfer real estate assets tax-free – Introduction

Real estate is generally considered a stable asset. Even more: as a rule, one can even expect real estate to increase in value steadily. The author Mark Twain already knew this, who recommended more than a century ago: “Buy land, it is no longer made!”

Well, it is clear that many people invest in real estate for this and many more good reasons. As long as asset management is active, you can benefit from such real estate investments in many ways. But at some point you should realize that you have to transfer the real estate assets built up or even inherited in the course of a lifetime. However, anyone thinking of a transfer of assets should also consider inheritance and gift tax. But this immediately presents another idea: how to transfer the real estate assets tax-free? And as so often in our introductions, you will also find our answer in this immediately: with our tax design!

2. Transfer real estate assets tax-free: legal bases

Well, in this article there are even two designs in more detail. We present these to you because there is a kind of sound barrier in asset transfers. Because assets above a value of EUR 26 million must be transferred in a different way than less assets. At the same time, the nature of assets is sometimes a challenge, but in turn.

2.1. Operational assets and administrative assets

First of all, § 13a ErbStG states that under certain conditions assets can be transferred 85% tax-free. On request, even 100% can be transferred tax-free, but stricter conditions apply. One of these conditions is that only business assets as beneficiary assets benefit from the tax exemption. That would actually exclude real estate assets. However, if we transfer a real estate company, the condition should be met again, right? Yes, basically yes, but the legislator has also considered this.

The point is that he has defined in an accompanying manner what constitutes harmful administrative assets within a beneficiary's assets. And real estate assets are basically part of it. If 10 % or more of the beneficiary's assets are administrative assets, the standard exemption shall not apply. However, anyone who reads in more detail in § 13b (4) no. 1 letter 1 ErbStG recognizes a legal loophole in it. It merely states that land transferred to third parties for use constitutes harmful administrative assets. We shall come back to that.

Limitation of the value of beneficiary assets

These findings from inheritance and gift tax law are also related to a value limit. The tax can only be optimized up to a value of EUR 26 million according to the above law. Fortunately, there is another option. Because the legislature has created § 28a ErbStG. However, the conditions for neutralising the tax are different here. Although this paragraph states that the tax office can completely waive the tax at the request of the taxpayers, the acquirer must prove that it is impossible for him to pay the tax from his freely available assets. Assets mean everything you have in money, including what you just inherited or received. If you have received only tax-advantaged company shares, you do not have to sell them in order to use the proceeds to pay the tax.

This gives us all the important foundations for being able to transfer real estate assets tax-free. Now let's see in detail how we succeed.

3. Transfer of real estate assets up to EUR 26 million tax-free

First, we are exploring our options to transfer real estate assets up to EUR 26 million tax-free. For this purpose, we choose the approach that § 13a paragraph 10 ErbStG opens up for us and submit the application offered there. Before that, however, we ensure that we bring our real estate assets into a GmbH & Co. KG so that we meet the requirement that the asset transfer is operating assets. Although real estate assets as administrative assets are actually excluded from the tax advantage, we can deal with it.

After all, real estate assets only constitute harmful administrative assets if we leave them to third parties for use. That is the legal loophole to which we referred earlier. As a rule, this means that real estate is only harmful management assets if we rent or lease them. However, if we only have an undeveloped plot of land or a building still under construction in our GmbH & Co. KG, this legal regulation does not affect us at all. We can also ensure that any existing tenants move out before the transfer of the property to meet this condition. In any case, there is no harmful administrative assets and we can transfer the real estate assets to the recipient tax-free via the partnership.

4. Real estate assets over EUR 26 million transferred tax-free

So this works as long as the real estate assets are less than EUR 26 million. If, for example, we are dealing with real estate worth EUR 50 million, we have to choose the approach according to § 28a ErbStG in order to transfer the real estate assets tax-free.

However, the recipient of our real estate assets must buy it from us in a first step. This probably means that a loan is necessary for this. The rental income ideally bears interest and repayment. Of course, we make sure that the sale is also tax-free by complying with the ten-year speculative period.

So in our example, we received EUR 50 million. We use these to acquire new properties, taking care that they have not been left to anyone for use. The GmbH & Co. KG, in which the new real estate assets are located, can then be transferred to the recipient tax-free – gift or inherit. For this purpose, the beneficiary submits the application according to § 28a ErbStG and proves that in addition to the previously purchased real estate assets, he has only the additional acquired assets. For this reason, the beneficiary cannot use freely available assets to pay the inheritance or gift tax. Therefore, the tax office has to waive the tax in accordance with the statutory regulations. And so we successfully transferred the real estate assets tax-free.

5. Transfer real estate assets tax-free – Conclusion

Of course, the design for the tax-free transfer of real estate assets with a value of over EUR 26 million may seem complex at first glance. Even with lower assets, there is a certain need for action. Finally, you have to make sure that there are no tenants. However, if it is the only way to achieve a tax-free transfer, then it should be considered. Especially since otherwise taxes are incurred at a considerable amount. Of course, one could also consider selling the real estate assets and using the proceeds instead to acquire company shares, which can then be transferred tax-free without a thorough arrangement. However, this would give up a whole series of advantages that come with real estate.