Tax tip: Usufruct of real estate in the event of a gift

The sooner the better: this motto applies to the transfer of property to children, provided the parents reserve the right of usufruct. The usufruct has the advantage that the parents continue to receive the rental income and can claim tax depreciation on the building. In particular, however, the gift tax value is reduced by the value of the usufruct, which means that gift tax can be saved. The younger the parents, the higher the usufruct value and the lower the gift tax.

However, what are the tax implications if the usufructuary right is later cancelled due to the death of the usufructuary or if the usufructuary waives it without or with payment of a consideration? In the event of death, nothing happens for tax purposes as long as the usufruct has existed for a certain period of time, depending on the age of the usufructuary. For example, more than 5 years in the case of a 70-year-old. If the usufructuary renounces the usufruct during his lifetime, for example because he no longer needs the income, the usufruct value determined at the time of renunciation constitutes a new gift. If, for example, the father receives an appropriate fee for waiving the usufruct, this has no effect on the gift tax that was originally to be assessed for the transfer of the property to the child.

The Münster Fiscal Court dealt with the question of whether this has legal consequences for income tax purposes. In the dispute, the tax office had argued that the redemption of a usufruct in return for payment resulted in income for the usufructuary within the meaning of Section 23 of the German Income Tax Act, as the time between the acquisition and sale of the usufruct was less than ten years. The Münster Fiscal Court disagreed with this and ruled in its judgement of 12 December 2023 (6 K 2489/22 E) that the redemption of the usufruct in return for payment is not a relevant transaction for income tax purposes. However, as an appeal to the Federal Fiscal Court has been authorised, it must make a final decision on this.