Anyone who has not fully paid off their property and transfers it free of charge (i.e., as a gift) before the ten-year period can suffer tax disadvantages. The Federal Finance Court (BFH) has ruled that in such a case, taxes must be paid on the debts assumed. This particularly affects private investors with direct financial obligations such as loans secured by the property.
The Tax Consequences of Debt Assumption
If a property is still encumbered (e.g., by a mortgage or loan), the recipient of the gift assumes these liabilities. Despite the gratuitous transfer, the assumption of the debts is considered an economic advantage for the transferor. This advantage is treated for tax purposes and can trigger a tax liability, even if no consideration is given.
The ten-year period plays a role here: If the property is transferred within ten years of acquisition, taxes may be due on the value of the assumed debts. This regulation can result in unexpected tax claims arising from the early gifting of a non-paid property – a so-called “tax trap.”
Recommendations for Private Investors
For private investors, this means:
| Situation | Tax Consequence |
|---|---|
| Property fully paid off | No tax on debt assumption |
| Property with remaining debt gifted within 10 years | Tax liability on assumed debts |
The BFH thus clarifies that the assumption of liabilities as part of a gift is not tax-free and must be carefully examined in the case of partially compensated or gratuitous property transfers.
It is therefore strongly recommended to seek tax advice before such a gift and to carefully calculate the consequences. This can help avoid unpleasant surprises.
Additionally, it is important to note: For more complex structures like trust agreements or shares in real estate owning LLCs, there are further specific regulations concerning real estate transfer tax. However, these pertain more to corporate law structures than to simple private gifts of encumbered properties.
In short: Anyone gifting a property that is not yet fully paid off should expect a possible taxation of the assumed debts – especially if the ten-year period since the acquisition of the property has not expired yet.