Tax Treatment of Externally Financed Property Donations
The tax treatment of property donations, especially when the property is not fully paid off, carries significant risks and can lead to tax traps. This has been clarified by the Federal Fiscal Court (BFH) in recent decisions.
Background: Donation of an Externally Financed Property
When a property is transferred gratuitously (i.e., as a gift) to another person, the acquisition is generally subject to gift tax. The amount depends on the value of the property, personal exemptions (depending on the degree of relationship), and the respective tax rates.
Special Features of Assumed Debts:
If the recipient assumes the debts associated with the property (e.g., loans) during the transfer, this is considered a counter-performance for tax purposes. The gift is thus partially taxable – it is a so-called mixed donation. This means: Not only the pure ownership of the property is transferred, but also the liability to the lender.
Tax Implications for Savers and Investors
- Gift Tax:
The value of the assumed loan increases the taxable value of the transferred asset. The tax office therefore examines both the market value of the property and the amount of the assumed liability. - Income Tax on Subsequent Sale:
If the gifted or partly paid property is sold within ten years after acquisition by the original owner, speculation tax may apply – depending on whether the property was used personally or not. - Deductions for Business Expenses:
Only if the loan has actually been assumed and thus creates a financial burden can interest be deducted as business expenses.
Impacts on Estate Regulations
- Inheritance vs. Donation:
Different exemptions and rules for taxation apply in the case of inheritance compared to a lifetime transfer through gift. - Ten-Year Period:
If a still unpaid object is gifted or inherited within ten years of the acquisition date and then sold, both speculation profit taxes and additional gift law examinations may be triggered. - Tax Debtor Identity:
If debts are transferred along, it must be examined who is ultimately liable for them – this affects both the valuation basis for taxes as well as possibly later liability risks.
Summary Table: Differences Between Pure Gratuitous and Mixed Transfers
| Features | Pure Gratuitous Transfer | Mixed Transfer (with Debt Assumption) |
|---|---|---|
| Valuation Basis | Market Value | Market Value + Assumed Liability |
| Tax Rate | According to Exemptions/Rate | As Above |
| Deductions for Business Expenses | Only with Own Liability | Only with Own Liability |
| Speculation Profit | Depends on Holding Period | Depends on Holding Period |
Conclusion
The current jurisprudence makes it clear: An unconsidered assumption of externally financed real estate within the framework of a donation agreement can lead to significant additional tax burdens.