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Some people have held investment properties for many years. As a rule, these are likely to be profitable and also generate a significant positive surplus. However, this also involves regular tax payments on the current income.

If you have owned the property for more than ten years, a swing solution by selling it within the family is a good option. The basic idea is as follows: After ten years, a privately held and rented property can generally be sold tax-free under German tax law. If the property is sold within the family, conditions should be agreed as between unrelated third parties.

The so-called tax-free step-up

How to proceed: The property or a co-ownership share is sold by means of a notarised contract at market value, for example between spouses or to the children. As a rule, the value of the property should have increased considerably compared to the time of purchase. The buyer receives new acquisition costs as a result of the purchase and thus also tax-effective depreciation on the value of the building and outdoor facilities.

This enables a so-called tax-free step-up for the selling family member and future taxable income for the acquiring family member is reduced by higher depreciation. If this takes place between married couples, for example, both benefit from this tax relief in the joint income tax assessment.

One example:

  • Historical value of the building (as a basis for calculating depreciation): 800,000 euros
  • Depreciation over 50 years: 2% of 800,000 euros = 16,000 euros p.a.
  • Current market value of the building: 1,500,000 euros
  • Depreciation over 50 years: 2% of 1,500,000 euros = 30,000 euros p.a.

> Important: The 50 years mentioned begin anew - this significantly extends the tax depreciation period, especially for older properties.

As described, the terms of the sale should be at arm's length. However, the purchase price can also be paid via a private loan agreement between family members, for example. The amortisation and interest payments can then be made from the rental income. In order to be recognised for tax purposes, it is also essential that these payments are not only agreed but also demonstrably made.

> Tip: If you are thinking about this option, consider whether you should realise the purchase via a joint spouses' partnership. Then the notary fees are only incurred once, even if you "rock the boat" again after ten years.