Calculating the statute of limitations for capital gains
In Germany, the sale of privately owned property is generally not subject to tax. However, there are some fundamental exceptions that result in tax liabilities on the capital gains made on the sale of property belonging to private individuals. We are continually asked by our customers as to when the sale of a property or plot of land is tax-free.
As a rule, we do not answer these questions ourselves but instead consult our business partners who, in their capacity as tax consultants, are happy to provide us and you with the answers. Each prospective sale must be regarded on a case-by-case basis, and there is an inherent risk in each instance of assessing the situation wrongly. This is why it is always advisable to consult an expert.
However, we would like to provide you with a general overview, and to this end have sought the advice of an expert. We have asked Mr Hans-Joachim Beck, to furnish us with a summary of the situation in terms of statutory taxation and to outline this for you.
Mr Beck is a former judge at the Berlin-Brandenburg Fiscal Court and today heads the Tax Department at the national offices of IVD (Immobilienverband Deutschland/Real Estate Association Germany) in Berlin. He has helped us out with complex situations many a time in the past.
Capital gains from private sales transactions (capital gains) § 23 EstG
The property forms part of the individual’s private assets
If the property does not form part of the business assets of a company, but is instead part of an individual’s private assets, then the capital gains made from selling the property are fundamentally not subject to any tax. The capital gains do not form part of the income from renting or leasing the property (§ 21 EStG), as this type of income only includes the remuneration for transferring the right of use. Pursuant to §23 EStG, an exception only applies when the property is sold within 10 years of the initial purchase. In this case, the capital gains are subject to tax; they are subject to the normal, so-called tariff-based tax rate. Unlike in other countries, there is no reduced tax rate for capital gains generated on private sales transactions in Germany.
Calculating the 10-year statute of limitations for capital gains from property sales
The legally binding purchase agreements
The two legally binding purchase agreements are key to calculating the 10-year statute of limitations. For the sake of clarity, these are often referred to as the ‘notarised contracts’. It is irrelevant when the transfer of encumbrances and benefits occurred or when the purchaser was entered into the Land Register as the owner.
Mr A bought a property with a purchase agreement dated June 10, 2005. He sells the property with a purchase agreement dated June 5, 2015. The transfer of encumbrances is arranged for August 1, 2015. Mr A is entered into the Land Register on October 12, 2015.
The 10-year statute of limitations begins on the day of contract finalisation on 10 June 2005. The sale is subject to capital gains tax if the purchase agreement is concluded within 10 years. The statute of limitations is calculated pursuant to § 108 of the German Fiscal Code (Abgabenordnungen, AO) in accordance with the regulations of the German Civil Code (BGB) (§§ 187 Para. 1, 188 Paras. 2 and 3 BGB), and thus expires at the end of the day whose number corresponds with that on which the purchase agreement was concluded. The statute of limitations therefore expires on 10 June 2015, so that Mr A should only sign the purchase agreement for his property on 11 June 2015 if he wishes to avoid the obligation to pay capital gains tax. Because he has signed the purchase agreement sooner, his capital gains are now subject to tax. The fact that the transfer of encumbrances and benefits occurs only after the 10 years have expired is irrelevant. This is because the transfer of encumbrances and benefits is only relevant insofar as this is the date from which Mr A can claim the building-AfA (AfA is the acronym for ‘Absetzung für Abnutzung’, which translates as ‘depreciation for wear and tear’) and operating costs as allowable deductions.
Purchase agreement that is legally binding for both parties
The purchase agreement becomes instrumental in calculating the statute of limitations only when it is legally binding for both parties. This applies both for the sale and purchase of the property.
Gifting and inheritances are not classed as transactions
Pursuant to §23 EStG, the gratuitous transfer of a property is not classed as a transaction and therefore cannot be subject to capital gains tax.
Mr A acquired a property for EUR 1 million with a purchase agreement dated 15 October 2009. On 8 July 2015, he gifts this property to his daughter. The market value of the property at this time is EUR 1.2 million.
Pursuant to § 23 EStG, the value increase of EUR 200,000 is not subject to capital gains tax. The gifting of the property does not represent a transaction, as it is a gratuitous transfer.
Date of acquisition in the event of a gratuitous transfer of property in the form of an inheritance or gift
If the seller acquired the property for free through an inheritance or as a gift, this also does not represent an acquisition, as the acquisition occurred gratuitously. In this instance, pursuant to § 23 Para. 1 Sentence 3 EStG, the acquisition of the property by the testator or the gift-giver is definitive for calculating the statute of limitations and the level of capital gains.
Withdrawal from business assets
The transfer of a property from a business asset to a private asset through withdrawal or the termination of a business is also classed as an acquisition.
Tax exemption in the case of private use - Period of private use
Even if the property is sold within the 10-year statute of limitations, the capital gains are tax-free pursuant to § 23 Para. 1 No. 1 Sentence 3 EStG if the property is used by the owner as a private residence. The owner must have continuously used the property as their own private residence
- throughout the entire period between the property’s acquisition (or completion) and sale,
- in the year it was acquired and during the two preceding years without any interruption.
Mr A buys a detached house from a developer with a purchase agreement dated 7 July 2013. The house is completed on 1 March 2014. Mr A moves into the house with his family. He sells the house on with a purchase agreement dated 4 October 2015 because he has to move to a different location for work reasons. The transfer of encumbrances is agreed for 1 December.
The capital gains from the sale are tax-free. However, the second of the two conditions is not met. Mr A has not used the house himself in the year it was acquired and during the two preceding years, as the house was only completed a year after the sale. Yet Mr A has met the first of the two conditions, because he was continuously using the house as his own private residence from the time it was completed until the time he sold it. However, the conditions for avoiding any tax liability would not be met if Mr A were to let the house to a tenant before selling it. In this case, the transfer of encumbrances is definitive.
Mr A decides to let the house to a lecturer for the month of November 2015.
In this case, the capital gains on the sale would not be tax-free, as the property was not exclusively reserved for the owner’s private use before the transfer of encumbrances. The financial authorities insist that the owner must have continuously used the property as their own private residence. By contrast, Mr A would incur no tax liability if he were to clear out the property on 1 November and leave it standing empty until 1 December. The first of the two alternatives is intended to exemplify an instance when the period between the acquisition/completion of the house is shorter than in the second alternative. However, one can derive a fundamental principle from this, namely that a house that is never let and has always been used as the owner’s private residence can always be sold without any tax liability. If the property was initially let, it then comes down to whether or not the owner used the property as their own private residence continuously in the year of its acquisition and in the two years before the sale. The owner’s use of the property as their private residence must continue up until the transfer of encumbrances. This condition is still met even when the property is vacated if the owner still has access to it. This own use of the property need not have occurred in complete calendar years, but must represent a continuous period.
A bought a rented condominium in 2009. The tenant moved out on October 1, 2013, so A moved into the flat with his family on November 1, 2013. Mr A sells the flat with a purchase agreement dated October 4, 2015. The transfer of encumbrances occurs on December 1, 2016.
In this case too, the capital gains from the sale of the apartment are not subject to tax. Yet Mr A has not met the conditions of the first alternative, as he has not continuously lived at the apartment since acquiring it, but instead initially let it out. However, Mr A did use the apartment as his own private residence ‘in the year it was acquired and during the two preceding years’. This is because he used the apartment as his own private residence continuously in 2015 as well as in 2014 and 2013. It doesn’t matter that he didn’t live at the apartment himself throughout all of 2013. This is because the second alternative for tax exemption does not feature any condition requiring the owner to use the apartment exclusively as their own private residence during these years. Owner-occupation is therefore not required to cover the full three calendar years before the sale. However, it does have to be a coherent – and continuous – period. This is why the tax exemption does not apply if the apartment is let during this period.
If the taxpayer uses part of the building for professional purposes, such as running a commercial enterprise or engaging in self-employment, this part of the building is excluded from the tax exemption. This is because the building’s use as the owner’s own private residence is a prerequisite for tax exemption. In the eyes of the financial authorities, this still applies if the owner has exercised their right to vote pursuant to § 8 EStDV and has not made this area of their home part of their business assets despite its use for commercial purposes because it is of minor importance (the value of the part of the property used for the owner’s own commercial activities is not greater than a fifth of the value of the entire property and not more than EUR 20,500). The tax exemption also doesn’t apply to employees if they are using the home as a work room/office. This is because in this instance too, the home is not being used for residential purposes. In the eyes of the financial authorities, this still applies if the costs for the work room/office are excluded from any tax-deductible business expenses pursuant to § 4 Para. 5 No. 6 b EStG.
Co-use by third parties
The criteria for owner-occupation are met when the owner lives in the home
- with their family members, or
- with third parties.
Mr A bought an owner-occupied apartment on 22 August 2010 and sold it again on 7 July 2015. He lived in the apartment together with his partner. The capital gains from the sale are tax-free because Mr A lived in the apartment himself, albeit with one other person.
The criteria of owner-occupation are also met if the home is only used by the owner as their place of residence on a part-time basis, but remains available to them for residential purposes the rest of the time. This is why homes that are used for a two-person household are still classed as owner-occupied. The same is true of holiday homes that are not offered to let and instead used exclusively by the owner.
Gratuitous transfer of the property
A gratuitous transfer of the property represents a form of owner-occupation only if the home is transferred to a child for which the owner can claim child benefit (‘Kindergeld’) or the statutory tax allowance pursuant to § 32 Para. 6 EStG. According to § 32 Para. 4 EStG, a child is only entitled to child benefit until they reach their 26th birthday.
Mr A lives with his family in Stuttgart. When his son moves to Konstanz to study there, Mr A buys an owner-occupied apartment in 2013, which he gratuitously transfers to his son. On 22 August 2015, Mr A sells this apartment again. The capital gains on the sale are tax-free because Mr A can claim child benefit for his son. Account must be taken of the fact that children are only entitled to child benefit until their 26th birthday, and that the special treatment given in cases of gratuitous transfer of property to children ends the moment that the claim to child benefit expires. If Mr A had let the apartment to his son, the capital gains would be subject to tax. However, in that case, Mr A would have been able to claim the costs for the apartment, especially debt interest and AfA, as allowable deductions.
Legal notice: This article is not legally binding and does not constitute tax or legal advice that could give rise to liability. For reliable information in your specific, individual case, please contact the attorneys or accountants appointed to advise you.