BFH: Tax-Free Sale of Real Estate from an Estate

Landmark Judgment of the Federal Finance Court, Case No.: IX R 13/22

When an heir of a community of heirs buys out their shares and subsequently sells a property from the estate, no income tax is due on this transaction. This was decided by the Federal Finance Court in a judgment dated September 26, 2023 (Case No.: IX R 13/22).

If a property is purchased and then resold within the speculative period of ten years, income tax is due on the profit. The Federal Finance Court has now established in a landmark decision that the tax does not apply if an heir takes over the shares of the remaining community of heirs and sells a property belonging to the estate. In this case, it is not a classic private disposal transaction, previously known as a speculative transaction, explains the commercial law firm MTR Legal Attorneys, which advises on tax law, among other areas.

Plaintiff Takes Over Shares of the Community of Heirs

In the underlying case, the plaintiff inherited 52 percent of his deceased wife’s estate. The rest went to the two children of the testatrix. The estate also included a piece of land. The man bought out the children’s share of the inheritance and thus became the sole owner of the property, which he then sold. Since less than ten years had passed between the acquisition and sale of the property, the responsible tax office considered the sale a private disposal transaction and taxed the profit accordingly.

BFH: Not a Classic Private Disposal Transaction

The plaintiff successfully contested the tax assessment. The BFH upheld the complaint. In its reasoning, the court stated that the acquisition of shares in a community of heirs is not equivalent to the purchase of a property from the estate. A prerequisite for taxation is that the sold property must have been acquired previously. This is not the case when taking over the shares of a community of heirs. There is no classic private disposal transaction under § 23 EStG when acquiring shares from other heirs and later selling a property belonging to the estate, the BFH clarified.

With this judgment, the Federal Finance Court has deviated from its previous case law. Communities of heirs should pay attention to how they want to handle real estate in the estate in order to realize a sale in a tax-optimized manner.

MTR Legal provides advice in tax law and in tax disputes with the financial authorities.

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