date | theme

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

10. July 2019 | Selling real estate to children: Depreciation + Save inheritance tax

8. December 2021 | Buy real estate from private – rent and sell tax-free

23. December 2021 | Real estate sale after divorce or with separated spouses – Attention tax trap!

17. January 2022 | Transfer of real estate assets: Attention – You have to pay attention! (this contribution)

The transfer of a property of the business assets to a close relative triggers the realization of hidden reserves that increase the operating profit. This can result in tax disadvantages if the property is subsequently sold or placed in an operating asset. We explain the consequences of the transfer of a property of the business assets.

The free transfer of a property of the business assets to a close relative can have negative tax consequences for the recipient. In the context of the transfer to the close relatives, a distinction must be made as to whether the property is given away or inherited.

If the succession occurs, the business passes to the heir or heirs by way of universal succession. Consequently, the discovery of the hidden reserves depends on how the heirs proceed with the operation. If they continue to operate in an appropriate manner with the property, there is no removal. The situation is different, however, if the property is detached from the operating assets for other purposes. For example, the property can be given away again or designated for residential use.

If a property of the business assets is released from the business assets by donation to a close relative, this leads to a removal for other business purposes by the donor. Then, by transferring the property of the operating assets to a close associate, hidden reserves are realized by adding the extraction profit to the profit of the donor.

In addition, in the further course of the process, further tax consequences may arise for the legal successor both in the case of inheritance and in the case of donation, if he sells the property or put it into a business asset.

The release of a property from the business assets for other purposes constitutes a removal of the legal predecessor. According to § 23 (1) sentence 2 EStG, an acquisition process is fabricated by the removal of a property from the current operation or on the occasion of an operating task. Therefore, an acquisition process is fictitious at the time of the removal or the operating task. This is imputable to the recipient in accordance with § 23 (1) sentence 3 EStG. Therefore, the removal of real estate from the business assets effectively constitutes an acquisition process of the legal successor. Certain legal consequences are attached to this.

First of all, the ten-year period for tax-free sales begins to run again, since a purchase is fictitious. The beginning of the period shall be linked to the time of removal. If the removed property is now resold within the ten years after the removal, this triggers the legal consequences of § 23 EStG. Then the legal successor faces a taxation of the capital gains.

But in order to be able to determine the capital gain, the acquisition costs must be offset against the proceeds according to § 23 (3) sentence 1 EStG. For this purpose, the acquisition costs must be determined. When determining the taxable profit, the acquisition costs or production costs according to § 23 (3) sentence 2 EStG are replaced by the assumed withdrawal value, i.e. the partial value at the time of withdrawal. The estimated value is the withdrawal value which was the basis for the tax assessment in the tax assessment period in which the property was removed from the operating assets. On the other hand, it does not matter whether the withdrawal value has been determined correctly. Rather, only the actual valuation is relevant for the approach. Consequently, this value constitutes the acquisition costs, which are then to be offset against the proceeds.

After a free transfer, a private sale transaction can of course also be used as a design option to reduce the tax burden on the capital gain. So you can achieve that the capital gain is subject to a lower tax rate. How this works we have explained in another article.

The regulation of § 23 (1) sentence 5 number 1 EStG is often overlooked. Under certain conditions, this standard feigns the contribution of a property to the business assets as a sale. For this purpose, the taxpayer must sell the property out of the business assets within ten years of the acquisition. The acquisition does not mean the deposit, but the actual acquisition process. Therefore, the aim of the standard is to absorb the hidden reserves obtained in private assets. It is true that the hidden reserves are already uncovered when the property of the operating assets is sold. Nevertheless, the legislature wishes to use the provisions of § 23 (1) sentence 5 no. 1 EStG to collect the part of the hidden reserves obtained in private assets which is attributable to the period between acquisition and contribution. Therefore, in addition to the taxation of the operating hidden reserves, the sale can also trigger the taxation of a capital gain under § 23 EStG. The following example is given:

The father acquires a property for 100,000 euros.

A year later he transfers it free of charge to his daughter.

This deposits the property at a partial value of 110,000 euros in the operating assets.

Two years later, she sells the property for 130,000 euros.

This situation is now taxed in two ways: