The taxation of speculation and increases in value on the property market are the focus of the legislator: anyone who buys a house and sells it again within ten years without living in it themselves must pay income tax on the profit.
But what happens if the property is transferred to the children in advance and then sold by them? Can the tax burden be reduced in this way? The Federal Fiscal Court ruled on this in a judgement on 23 April 2021.
Children receive property as a gift - and sell on the same day
In this specific case, a taxpayer had proceeded in exactly the same way: She wanted to sell a property after just one year due to a favourable opportunity - with a profit of around 100,000 euros. A buyer had already been found. Without question, her profit would have been taxable. The owner therefore gave the property away to her children - and they sold the house on the same day. This resulted in a tax advantage of 15,000 euros.
The children should also pay tax on the profit, but significantly less. The reasoning: The mother's income tax rate was higher than that of the children due to her other income and the progressive tax rate.
Jürgen Lindauer
Director, Tax
KPMG AG Wirtschaftsprüfungsgesellschaft
Tax office and tax court see abuse of tax planning
This resulted in a tax advantage for the children of around EUR 15,000 compared to a sale by the mother. The gift was neither made with the obligation to sell the property nor to transfer the profit to the mother.
Nevertheless, the tax office and subsequently the Munich Fiscal Court saw this as a so-called abuse of structuring within the meaning of Section 42 of the German Fiscal Code and wanted to tax the profit to the mother.
Federal Fiscal Court declares procedure legal
The Federal Fiscal Court disagreed and found that there was no abuse of structuring in this respect. It stated that the gift from the mother meant that the children followed in the mother's footsteps for tax purposes with regard to the time of acquisition and the acquisition costs.
This means that the children are of course also taxed, but this is done taking into account their personal circumstances - in this case, a lower tax rate. In this respect, the gift to the children and the subsequent sale do not constitute an abuse of tax planning.
Important conclusion for taxpayers
It also states that taxpayers can generally organise legal relationships in such a way that the tax burden is minimised. The desire to save taxes does not in itself make an arrangement inappropriate. The situation would have been different if the mother had received the capital gain back, i.e. if the children had not become fully authorised owners.
