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Avoid inheritance tax by selling to children
Rising property values clash with fixed tax exemptions – an expensive pitfall for many heirs. Selling your property to your own children could be the solution to secure assets. Learn how to legally optimise inheritance tax and avoid pitfalls.
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Selling the property to children can legally avoid inheritance tax and creates additional tax benefits through new depreciation opportunities.
The combination of selling assets below market value (mixed gift) and utilizing 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 its taxable value.
Wondering how to optimally pass on your real estate assets to the next generation while minimising tax implications? The statutory inheritance tax allowances have been unchanged for years, while property prices have risen sharply. This often results in a significant tax burden for many families, often amounting to tens of thousands of euros. A well-considered alternative to a classic gift or inheritance is selling the property to your own children. This approach can not only avoid inheritance tax by selling to children but also create new tax advantages for your family. In this article, we will show you the strategic steps and legal framework for successful implementation.
Sale Instead of Gift: A sale during one's lifetime can entirely avoid inheritance tax and create new depreciation potential for children of 2% annually on the building value.
Use 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 Rights: 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 doesn't have to be paid immediately. A loan from you to your child, which is later gradually forgiven, is a flexible and recognised method.
Exemption from Real Estate Transfer Tax: When selling to direct descendants (children), there is no real estate transfer tax, which means savings of up to 6.5% of the purchase price.
Inheriting a property from parents is the traditional route, but it is often the most expensive. The personal allowance for children is €400,000 per parent. If the property's value exceeds this amount, tax rates ranging from 7% to 30% on the excess can quickly apply. For a property valued at €600,000, €200,000 would already be taxable. Additionally, the property's depreciation potential is often exhausted by the parents, meaning that the children can hardly claim any tax advantages from future rentals. Therefore, early planning is crucial to protect family wealth. The legal avoidance of inheritance tax requires a strategic approach. This situation makes selling an attractive alternative.
Selling your property to your child at a realistic market price is the most straightforward way to avoid inheritance tax. The sale is tax-free for you as parents if you have owned the property for more than 10 years or have lived in it yourself. For your child, a new depreciation period begins with the purchase. They can deduct 2% of the building's value from rental income annually, significantly reducing the tax burden. To ensure this model is legally sound, a so-called arm's length comparison is crucial. This means the sale must occur under conditions that are customary among unrelated parties. A professional market value appraisal is essential to justify the price to the tax office. An accurate market value for the tax office is the basis for any sound planning. Financing can be creatively structured.
What if your child can't afford the full market price, or you want to give them a greater advantage? 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 exemption limit of €400,000 and is therefore completely tax-free. This way, the wealth is transferred without incurring gift or inheritance tax. Again, what's crucial here is proper documentation:
Have the exact market value determined by an appraisal.
Set up a notarial sales contract that clearly separates the purchase price and the gifting intention.
Report the gift to the tax office within three months, even if no tax is due.
This method combines the benefits of selling with the high exemption allowances of gifting. This also allows for real estate values over 1 million euros to be transferred tax-free through two parents. The next step secures your own position.
A sale does not mean that 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 rental income. This right has high financial value, which is deducted from the value of the property, further reducing the basis for any potential gift tax. The value of the usufruct is calculated based on statistical life expectancy and 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 value for tax purposes by up to 40%, depending on the age of the beneficiaries. Thus, it is a powerful tool when selling a property below market value to relatives. But how is the purchase price financed?
Your child does not need to borrow the purchase price from a bank. You, as the seller, can grant a loan yourself. The terms must be 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 big advantage: you retain control over the finances. Additionally, you can gradually forgive the loan debt later and use the gift tax allowances again. Every 10 years, you can forgive up to €400,000 to your child tax-free. This way, the purchase price is 'reduced' over time without any tax being incurred. An inheritance tax calculator can help compare different scenarios. This flexibility makes the model particularly attractive.
To bypass inheritance tax through a sale to your children is a legal and often very advantageous strategy. It not only protects your assets from the tax authorities, but also offers tangible income tax advantages for your children through new depreciation. Models like mixed gifting and securing through a usufruct right provide enormous flexibility in structuring. The key to success lies in a clean, professional execution. An accurate valuation report is essential to avoid falling into the trap of a disguised gift. Are you unsure of the realistic value of your property? The AI-supported ImmoGPT chat from Auctoa provides a preliminary, data-based assessment in just a few minutes. A comprehensive evaluation is the first step towards your tax-optimized asset succession.
The Federal Ministry of Finance provides general information and legal foundations regarding inheritance and gift tax on its official website.
An expert report by the Scientific Advisory Board at the Federal Ministry of Finance deals in detail with inheritance tax.
The Tagesschau examines inheritance tax on real estate and its effects in an article.
Finanztip offers 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 on record figures for inheritance and gift tax in Germany in 2023.
Does the sale to my child need to be notarised?
Yes, every property sale in Germany, even within the family, requires a notarised contract. The notary also initiates the necessary changes to the land register.
What happens if siblings are disadvantaged?
A sale below market value to one child can result in compulsory share supplementation claims by other siblings in the event of inheritance. To avoid disputes, either all children should be treated equally, or clear, written agreements (e.g. a waiver of inheritance in exchange for compensation) should be made.
Can I reclaim the property if my child wants to sell it?
A simple right of reclamation does not exist after a sale. However, you can include specific reversion clauses in the notarised contract, for instance, in the event the child sells the property without your consent, becomes insolvent, or dies before you.
What role does the market value of the property play?
The market value is the crucial factor. It serves as the assessment basis for the gift tax by the tax office in a sale below market value. A realistic value determined by experts protects against additional claims and legal uncertainty.
What is the difference between usufruct and a right of residence?
The right of residence only allows you to live in the property. The right of usufruct is more comprehensive: it permits you not only to reside in the property but also to rent it out and keep the rental income. For tax purposes, usufruct is therefore more valuable.
Is real estate transfer tax due when selling to children?
No. Sales of properties to direct relatives (parents to children, grandparents to grandchildren) are exempt from real estate transfer tax. This is a significant cost advantage compared to a sale to third parties.
