Tax-free property sales: Why every day counts when it comes to the ten-year period

Anyone who holds a property in their private assets for at least ten years may subsequently sell it tax-free. However, care must be taken when calculating the ten-year period. This is demonstrated by the latest ruling of the Federal Fiscal Court (BFH) in case IX B 24/26.

In the case in question, a married couple purchased a property under a contract of sale dated 28 December 2009. This property was subsequently sold to a third party under a contract of sale dated 22 June 2018. The latter contract of sale stipulated that a large part of the purchase price was not due until 31 December 2019 and that ownership of the property would therefore only pass to the new purchaser on that date. In the plaintiffs’ view, this meant that the ten-year period had not been breached, as there were more than ten years between 28 December 2009 and 31 December 2019.

The tax office and the Bremen Tax Court both rejected this view. They held that, when calculating the ten-year period under Section 23 of the Income Tax Act, the date of the respective contracts of sale was the sole determining factor. Upon conclusion of a contract of sale, the contracting parties enter into a binding commitment to transfer ownership of the property. From that point onwards, neither party may unilaterally withdraw from the contract of sale. The date on which the purchase price was actually paid, or the entry in the land register, is therefore irrelevant. As less than ten years elapsed between the purchase agreements, the profit realised in the case in question is taxable in full. 

These principles have already been examined by the Federal Fiscal Court (BFH) in the past. In this respect, it comes as little surprise that the BFH has concurred with the ruling of the Finance Court. In the case in question, the plaintiffs made a profit of around half a million euros from the sale of the property. This profit is taxable at the plaintiffs’ personal tax rate. At a tax rate of 42 per cent, this results in income tax of 210,000 euros plus the solidarity surcharge.

However, the ten-year period is reduced to three years if the property was previously occupied by the owners themselves. Had the claimants therefore lived in the property themselves between 2016 and 2018, the sale would have been tax-free in full. It should also be noted that the tax exemption is only granted if the property is held as part of one’s private assets. If a property is classified as business assets, any profit arising from its sale is always taxable. Taxpayers should therefore carefully check all the conditions for tax exemption before selling the property.

The possibility of tax-free disposal after ten years has recently been the subject of political debate. Just recently, Alliance 90/The Greens reignited the debate with a draft bill (Parliamentary Paper 21/7081), which proposes to abolish the option of tax-free disposal of properties not occupied as the owner’s main residence without providing any alternative. In the parliamentary group’s view, this would close a social policy tax loophole, whilst also increasing tax revenue by an estimated 6 billion euros annually. However, the option to sell a property previously occupied by the owner after three years should remain in place. The tax reform currently proposed by the CDU/CSU and SPD parliamentary groups does not, however, provide for the abolition of the tax exemption after ten years.