Inheritance Manager
Real Estate Legal Information
Legally avoid inheritance tax on real estate
Inheriting a property is often associated with a significant tax demand from the tax office. But did you know that inheritance tax on properties can be legally avoided or at least drastically reduced? This article presents seven effective strategies to help you secure your property inheritance rather than having to share it with the tax authorities.
With access to Google, BORIS, and Deep Research.
Utilise personal allowances (e.g. €500,000 for spouses, €400,000 for children) every ten years through lifetime gifts to gradually reduce the tax burden to zero.
Maintain control and reduce the taxable value of a property by giving it away, while securing a lifelong usufruct or right of residence.
Demonstrate to the tax office a realistic, and often lower, property value through a professional market value appraisal to directly reduce the assessment basis.
When the transfer of a property to the next generation is impending, the question of inheritance tax inevitably arises. The legal requirements are complex and the financial burdens can quickly diminish an inheritance. Many property owners and their heirs fear that a considerable portion of the wealth – up to 50% of the property's value – will go to the tax office. However, with proactive planning and the right knowledge, the tax burden can be significantly reduced. In this guide, as your digital companion for property valuation, we present the crucial legal methods, from using tax allowances and lifetime gifts to the strategic importance of an accurate market value appraisal. This way, you can effectively protect your wealth.
The amount of inheritance tax depends on two factors: the degree of relationship and the value of the property. The law categorises heirs into three tax classes, which determine tax allowances and rates. Spouses and registered civil partners (Tax Class I) benefit from the highest exemption of 500,000 euros. Children are entitled to 400,000 euros, while grandchildren can inherit 200,000 euros tax-free. For siblings, nieces, and nephews (Tax Class II), the exemption drastically reduces to only 20,000 euros. Everything above these amounts is taxed at rates between 7% and 50%. An accurate valuation of the property's value is therefore the first step in accurately assessing the potential tax burden. Only with this knowledge can the following strategies fully unfold their effectiveness.
Why wait for the inheritance when you can set the course today? A lifetime gift is one of the most effective methods to legally avoid inheritance tax. The key here is the 10-year rule. Every ten years, personal allowances can be fully utilized again. A parent can, therefore, transfer assets worth 400,000 euros to their child tax-free every ten years. With a property valued at 800,000 euros, the tax burden can be reduced to zero through two gifts spaced ten years apart. This approach offers decisive advantages:
Utilization of personal allowances every 10 years.
Reduction of the future estate value and thus the tax progression.
Ordered and planned transfer of wealth to the next generation.
Reduction of potential compulsory share claims by other heirs.
Early planning is crucial here, as the clock starts ticking from the moment of the gift. Learn more about the details in our article on gift tax for real estate. But what if you want to transfer the property yet continue using it?
Transfer the property to the children but continue receiving rental income or live in it yourself? This is exactly what the reservation of a usufruct or right of residence allows. In a gift with usufruct reservation, the recipient becomes the legal owner, but the donor retains the comprehensive right of use. This usufruct has a capital value that is deducted from the property value, thereby reducing the tax base for gift tax. The value of the usufruct is calculated based on the statistical life expectancy of the donor and potential rental income and can reduce the tax burden by 30% to 50%. A 65-year-old donor can thus significantly reduce the taxable value of a property. Our inheritance tax calculator helps you assess this potential. For an owner-occupied home, there is even a more direct solution.
The legislature offers special protection to the family home. Under certain conditions, the so-called family home can be inherited completely tax-free. For the surviving spouse or registered partner, the inheritance tax on the jointly occupied property is entirely waived, provided they continue to live in it for at least ten more years. If they give up its use before this period, tax is levied retrospectively unless they are prevented from doing so for compelling reasons (e.g., the need for care). Children can also inherit the family home tax-free, but there is a limitation that the living space should not exceed 200 square metres. Anything beyond this will be taxed proportionally. They too must move in immediately and live there for ten years. After the period has expired, a tax-free sale is possible, although the speculation period upon sale must be observed. This regulation is a powerful tool but applies only to very specific circumstances.
What to do if the value of a property exceeds the tax allowances of direct heirs? Here, the consecutive gifting can be a legal solution to distribute the tax burden. Instead of grandparents gifting a property directly to their grandchildren (allowance €200,000), they can first transfer it to their own children (allowance €400,000). The child can then re-gift the property or parts of it to the grandchild, using a tax allowance again. This way, with a gift from grandfather to grandchild via the father, a total of €800,000 (€400,000 grandfather -> father, €400,000 father -> grandchild) can be transferred tax-free. It is important that there is no legal obligation for further transfer between the gifts and some time must pass. This method is particularly useful for bypassing the low allowances for nieces and nephews. An alternative to gifting can be selling.
Sometimes, selling the property to the next generation is the most sensible option from a tax and economic perspective. A sale does not trigger inheritance or gift tax, but it may potentially lead to speculative tax, which, however, no longer applies after ten years of ownership. The sale price can also be below market value. Such a sale below value to relatives is considered a mixed gift by the tax office. The difference between the purchase price and the market value is regarded as a gift, which can often be covered by personal allowances. This strategy has two advantages: the parents receive liquidity from the sale, and the children acquire the property at a favourable price. However, for all these models, one point is non-negotiable: the correct value of the property.
Every calculation of inheritance tax begins with the value of the property. The tax office often uses standardised methods for this valuation, which do not always reflect the true market value and tend to be overestimated. A lower property value means a lower tax. You have the right to prove a lower value with a qualified market value appraisal. Such an appraisal takes into account individual features like building damage, a backlog of repairs, or an unfavourable location, which can reduce the value by 15-20%. The role of the appraisal in the case of inheritance is therefore central. An appraisal prepared by experts such as Auctoa provides the necessary legal security with the tax office. The following reasons highlight the necessity:
It creates a realistic and often lower basis for assessment.
It serves as recognised evidence for submission to the tax office.
It reveals value-reducing factors that standard methods ignore.
It is the basis for the correct calculation of usufruct rights.
It prevents conflicts between co-heirs over the value of the property.
With our Auctoa Inheritance Manager or an initial consultation in the ImmoGPT chat, you can receive a quick initial assessment and plan the next steps.
Inheritance tax on property is not an unavoidable fate. The strategies outlined show that through timely and smart planning, you can legally and significantly reduce your tax burden. The key is not to wait until the inheritance occurs but to actively manage the succession of assets. The combination of using tax allowances, making lifetime gifts, usufruct, and obtaining an accurate market value assessment forms the strongest toolkit to secure your property assets for the next generation. You shape the future of your wealth today.
Destatis provides a press release on the revenues from inheritance and gift tax in the first half of 2024.
Destatis provides publications on the topic of inheritance tax.
The Federal Ministry of Finance offers official information on inheritance and gift tax.
The Tagesschau delivers an article on inheritance and gift tax.
Deutschlandfunk provides a contribution on inheritance tax and allowances for heirs in 2023.
Zeit publishes an article on record revenues from inheritance and gift tax in Germany in 2023.
Haufe offers an article on inherited and gifted assets in 2023.
Destatis provides a press release on the revenues from inheritance and gift tax in the first half of 2023.
How long do I need to live in the inherited family home to receive tax exemption?
To benefit from full tax exemption for the family home, as an heir (spouse or child), you must occupy the property yourself for a period of ten years following the inheritance. Abandoning the use before the period expires usually results in retroactive taxation.
What value does the tax office assign to an inherited property?
The tax office generally determines the value of a property through standardised valuation methods (e.g., comparative value or real value method). These values may exceed the actual market value. However, you have the right to prove a lower market value through an expert report.
What is the advantage of usufruct over a mere right of residence?
Usufruct is more comprehensive than the right of residence. While the right of residence only allows living in the property, usufruct additionally permits economic use, such as renting out and retaining rental income. Both reduce the taxable value of the property.
Can I avoid inheritance tax by selling the property?
Yes, selling to future heirs is an option. A sale does not trigger inheritance tax. If the property is sold below market value, the difference is considered a gift, but this can often be covered by allowances. This also provides liquidity to the sellers.
Does a chain gift work for non-related individuals?
Theoretically yes, but it is usually not tax-efficient. The allowances for non-related individuals (tax class III) are very low at €20,000, and the tax rates are very high at 30% to 50%. The strategy is most effective within the family (tax class I).
What is a super legacy and does it help with inheritance tax?
A super legacy is an arrangement within a Berlin will. It gives the surviving spouse the flexibility to pass parts of the estate to the children in a tax-optimised manner, utilising their allowances in the first case of inheritance to reduce the family's overall tax burden.
