Rising property values meet fixed tax allowances – a costly trap for many heirs. Selling your property to your own children might be the solution to preserving wealth. Learn how to legally optimise inheritance tax and avoid pitfalls.
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The topic briefly and concisely
Selling the property to children can legally avoid inheritance tax and create additional tax advantages through new depreciation opportunities.
The combination of selling below value (mixed donation) and using the gift tax allowance of €400,000 is one of the most effective strategies.
A usufruct right ensures that the parents can continue to use the property and significantly reduces the taxable value.
Are you wondering how to pass on your real estate assets to the next generation in the most tax-efficient way? Inheritance tax allowances have remained unchanged for years, while property prices have risen sharply. This results in a significant tax burden for many families, often amounting to tens of thousands of euros. A considered alternative to the classic gift or inheritance is selling the property to your own children. This approach can not only circumvent inheritance tax by selling to children but also create new tax advantages for your family. In this article, we'll outline the strategic steps and legal framework for a successful implementation.
Key Takeaways: Strategies for Tax Optimization
Sale instead of Gift: A sale during your lifetime can completely avoid inheritance tax and creates new depreciation potential for the children at 2% annually on the building value.
Utilize Mixed Gift: Sell the property below market value. The difference is considered a gift and can be covered by the tax allowance of €400,000 per child and parent every 10 years.
Secure Usufruct Right: Retain a lifelong right of residence or use. The value of the usufruct reduces the taxable value of the property by up to €450,000 or more, depending on age.
Seller Loan: The purchase price does not have to be paid immediately. A loan from you to your child, which is gradually forgiven, is a flexible and recognized method.
No Property Transfer Tax: When selling to direct descendants (children), no property transfer tax is incurred, which means savings of up to 6.5% of the purchase price.
The tax trap in traditional real estate inheritance
Inheritance of property to children is the classic route, but often the most expensive. The personal allowance for children is €400,000 per parent. If the property value exceeds this amount, tax rates between 7% and 30% are quickly applied to the excess. For a property value of €600,000, already €200,000 would be taxable. Furthermore, the depreciation potential of the property is often already exhausted by the parents, leaving the children with hardly any tax benefits in case of later rental. Early planning is thus crucial to protect family wealth. The legal avoidance of inheritance tax requires strategic action. This situation makes selling an attractive alternative.
Sale at Market Value: The Clean Way to Save on Taxes
Selling your property to your child at a realistic market price is the most straightforward method to avoid inheritance tax. The sale is tax-free for you as parents if you have owned or lived in the property for more than 10 years. For your child, a new depreciation period begins with the purchase. They can deduct 2% of the building's value annually from their rental income, significantly reducing the tax burden. To make this model legally sound, a so-called third-party comparison is crucial. This means that the sale must take place under conditions that would also be common among unrelated third parties. A professional valuation report is essential for this to justify the price to the tax authorities. An exact market value for the tax office is the basis of any solid planning. Financing can be creatively structured.
The Mixed Gift: The Royal Path for High-Value Real Estate
What if your child cannot afford the full market price, or you want to give them a larger benefit? This is where mixed gifting comes into play. You sell the house to your child, but at a price deliberately below market value. Suppose your property is worth €500,000, and you sell it for €150,000. The difference of €350,000 is considered a gift by the tax office. This amount is below the personal allowance of €400,000 and is therefore completely tax-free. This way, wealth is transferred without incurring gift or inheritance tax. Proper documentation is also crucial here:
Have an appraisal determine the exact market value.
Draft a notarised purchase contract that clearly separates the purchase price from the intention to gift.
Report the gift to the tax office within three months, even if no tax is due.
This method combines the advantages of selling with the high allowances of gifting. This allows real estate values over 1 million euros to be transferred tax-free through two parents. The next step safeguards your own position.
Usufruct and right of residence: Securing personal use and further reducing taxes
A sale does not mean you have to move out. By registering a usufruct right in the land register, you retain the lifelong right to live in the property yourself or to receive the rental income. This right has a significant financial value, which is deducted from the value of the property and thus further reduces the tax base for any potential gift tax. The value of the usufruct is calculated based on the statistical life expectancy and the potential rental income. For a 65-year-old parent, the value of the usufruct can easily amount to €150,000 or more, which correspondingly reduces the taxable gift portion. A usufruct reduces the property's value for tax purposes by up to 40%, depending on the age of the beneficiaries. This makes it a powerful tool if you sell a property at a below-market price to relatives. But how is the purchase price financed?
The Vendor Loan: Structuring Financing Flexibly
Your child does not need to borrow the purchase price from a bank. You, as the seller, can grant a loan yourself. The conditions must be at arm's length: a written contract, a reasonable interest rate (e.g., 2-3%), and regular interest payments are required for the tax office to recognise the arrangement. The great advantage: you retain control over the finances. Furthermore, you can gradually waive the loan debt later and use the gift tax allowances again. Every 10 years, you can waive up to €400,000 for your child tax-free. In this way, the purchase price is "melted away" over time without any tax being incurred. An inheritance tax calculator can help compare different scenarios. This flexibility makes the model particularly attractive.
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Circumventing inheritance tax through a sale to children is a legal and often highly advantageous strategy. It not only protects your assets from the tax authority's reach but also creates tangible income tax benefits for your children through new depreciation. Models such as mixed gifts and safeguards through a usufruct right offer enormous scope for planning. The key to success lies in a clean, professional implementation. An accurate valuation report is the foundation to avoid falling into the trap of a concealed gift. Are you unsure about the realistic value of your property? The AI-powered ImmoGPT chat from Auctoa provides you with an initial, data-based assessment in just a few minutes. A well-founded valuation is the first step towards your tax-optimised wealth succession.
Additional useful links
The Federal Ministry of Finance offers general information and legal foundations on inheritance and gift tax on their official site.
An expert opinion by the Scientific Advisory Board at the Federal Ministry of Finance deals in detail with inheritance tax.
The Tagesschau highlights in an article the inheritance tax on real estate and its effects.
Finanztip provides a guide on inheritance tax with useful tips and information for heirs.
The Federal Statistical Office (Destatis) publishes a press release on inheritance and gift tax.
Further publications by the Federal Statistical Office (Destatis) are available on the topic of inheritance tax.
Die Zeit reports in an online article about record levels of inheritance and gift tax in Germany in 2023.
FAQ
Does the sale to my child need to be notarised?
Yes, every property sale in Germany, even within the family, necessarily requires a notarised purchase agreement. The notary also facilitates the necessary changes to the land register.
What happens when siblings are disadvantaged?
A sale below value to a child can lead to claims for compulsory portion supplements from other siblings in the event of inheritance. To avoid disputes, either all children should be treated equally or clear, written agreements (e.g., a renunciation of inheritance in exchange for compensation) should be made.
Can I reclaim the property if my child wants to sell it?
A straightforward right of recovery does not exist after a sale. However, you can agree on certain reversion clauses in the notarial contract, for example, in case the child sells the property without your consent, becomes insolvent, or passes away before you.
What role does the market value of the property play?
The market value is the key figure. It serves as the basis for the tax office to calculate the gift tax in the case of a sale below value. A realistic value determined by experts protects against additional demands and legal uncertainty.
What is the difference between right of residence and usufruct?
The right of residence only allows you to live in the property. The usufruct right is more comprehensive: it not only allows you to live in the property yourself, but also to rent it out and keep the rental income for yourself. Therefore, for tax calculation, the usufruct is more valuable.
Is land transfer tax payable when selling to children?
No. Sales of real estate to direct relatives (parents to children, grandparents to grandchildren) are exempt from property transfer tax. This is a significant cost advantage compared to a sale to third parties.
