Encouraging Federal Fiscal Court Ruling Strengthens Tax Exemption for Heirs

With regard to inheritance tax, the family home enjoys one of the most significant tax breaks under German tax law. If the parents bequeath their owner-occupied home to a child, and the child then moves into it immediately and continues to live there for the next ten years, the acquisition remains tax-free. However, this tax exemption is limited to 200 square metres of living space for children. The law does not, however, impose any area restrictions on the associated plot of land. 

In its judgement of 17 June 2026 (Ref. II R 27/23), the Federal Fiscal Court defined the scope of the term ‘eligible property’ for the first time, thereby reaching a decision that is welcome news for heirs. Germany’s highest tax court has ruled on which areas of land, in addition to the residential property itself, may be covered by the tax exemption. Until now, the Federal Fiscal Court had not had to address this issue.

The proceedings concerned the case of a son who inherited his father’s family home. The property consisted of a residential house and several adjoining plots of garden and access road land. The total land area amounted to more than 2,000 square metres, with the residential house standing on a designated plot of land covering just 837 square metres. The tax office wished to apply the tax exemption only to the plot on which the residential house stood. The Lower Saxony Finance Court initially upheld this view in its judgement of 12 July 2023 (Case No. 3 K 14/23). Under this ruling, only around €520,000 would have remained tax-exempt. The Federal Fiscal Court has now overturned this decision and taken the entire economic unit into account. This resulted in an additional tax exemption of more than €650,000 for the heir.

In the view of the Federal Fiscal Court, it is not solely the built-up plot of land that matters. Rather, the decisive factor is the so-called ‘economic unit’ as defined under the Valuation Act. If, for valuation purposes, several plots of land form an economic unit and are used jointly as a residential property, garden and access path, they may, as a whole, be regarded as part of a family home eligible for tax relief.

The local tax office with jurisdiction over the property in question determines which plots of land and buildings form part of an economic unit. The inheritance tax office is bound by this determination. Anyone who considers the allocation of land to be incorrect must therefore act at an early stage. In the subsequent inheritance tax proceedings, it is generally no longer possible to successfully raise objections.

Property owners can already check for themselves which parcels of land form part of their economic unit. A glance at the property tax assessment notice is all it takes. This lists all the parcels of land that have been grouped together as a single economic unit in accordance with the provisions of the Valuation Act. The notice therefore also provides an initial indication of which areas may later be covered by the tax exemption for the family home.

Owners of larger plots of land should check whether adjacent gardens, paths or open spaces are, for valuation purposes, part of the same economic unit as the residential property. This is because, in the event of inheritance, the question of which areas form part of the economic unit can determine whether an additional tax exemption applies.