Federal Finance Court clarifies tax treatment of interest-free family property sales

Berlin. For years, property buyers and developers in many German regions have been complaining about high land prices and construction costs. Those who can purchase a developed property within the family can count themselves lucky.

From a tax perspective, however, it is important to be careful in these cases so that those involved do not experience any unpleasant surprises. At least that's what happened to a couple whose case was recently decided by the Federal Finance Court (ref. VIII R 30/24).

The couple had sold their daughter a developed piece of land. The seller and buyer agreed that the purchase price would initially be deferred. From May 2021 it was supposed to be repaid in installments, although no interest was provided. The parents viewed the resulting reduced purchase price as a gift to their daughter.

However, based on a control notification, the responsible tax office examined the matter and assumed interest would be charged. The authority determined this with reference to Section 12 Paragraph 3 of the Valuation Act. She also used an arithmetic repayment portion for the calculation.

In the opinion of the judges there, the agreed interest-free installment payment was expressly not capital gains subject to income tax. Instead, they assumed that the parents had given their daughter the difference between the usual purchase price and the cash value purchase price determined by the tax office.

In the subsequent appeal, the Federal Finance Court did not entirely follow the lower court's assessment, but came to the same conclusion regarding the legal consequences. Unlike the tax court, he did not see any so-called generous inter vivos donation in the agreement. The daughter had agreed to pay her parents the value of the property as the purchase price. Accordingly, there was no transfer of assets between those involved. In addition, an interest-free deferral does not constitute a gift when viewed in isolation.

However, the Federal Finance Court also did not see any income from capital assets. This results from the fact that, in accordance with the agreement between the sellers and the buyer, each installment is fully credited towards the purchase price. There is therefore no need to divide the interest and repayment portions.

With its decision, the Federal Finance Court has made a change to its previous case law. This expressly applies to transactions in which a non-interest-bearing installment payment is agreed between related parties to finance the purchase price of a property.

However, it remains unclear how the highest tax court would rule if the sale were within the deadline for a private sale transaction. If real estate changes hands in less than ten years, the profit from the sale must be taxed as personal income. In the present case, the ten-year period had already expired.

Selling property within the family offers tax advantages. For example, there is no real estate transfer tax for direct relatives - i.e. for real estate transactions between parents, children or grandchildren.

If there is a genuine purchase contract, those entitled to a compulsory share can no longer contest it, unlike a gift. In addition, there is no gift tax if the property is sold at market value.

In order to benefit from the advantages, the valuation is important. This means that families must make sure that the purchase price is in line with the market. If this is not the case, the responsible tax office will consider the difference between the market price and the agreed price as a gift. Depending on the value and the individual exemption amount, gift tax then applies.