Real estate inheritance law for apartment buildings

Fundamentals of German inheritance law

Upon the death of the testator, nearly all rights and obligations automatically pass to the heirs. This includes real estate, debts, and ongoing contracts.

If no will or inheritance contract exists, the statutory order of succession applies. It determines who inherits and in what proportion. Direct descendants of the deceased, such as children and grandchildren, inherit first. If there are no descendants, the parents and their descendants—such as siblings, nieces, and nephews of the deceased—inherit.

If the deceased was married, the spouse also has a statutory inheritance claim. The size of this share depends both on the presence of other statutory heirs and on the marital property regime—community of accrued gains (Zugewinngemeinschaft), separation of property (Gütertrennung), or community of property (Gütergemeinschaft).

When there are multiple heirs, they form a community of heirs (Erbengemeinschaft). The estate, including real estate, belongs to them jointly until an amicable division is agreed upon or a legal settlement is carried out. In the case of real estate, this can often lead to conflicts if the heirs cannot agree on use, rental, or sale of the property.

Special rules apply for minor heirs, where inheritance law, family law, and guardianship law intersect. If there are no direct heirs, more distant relatives—or, as a last resort, the state—may inherit.

Through a will or inheritance contract, the testator can deviate from statutory succession and specify individually who receives what. Nevertheless, certain close relatives, particularly children and spouses, have a compulsory portion (Pflichtteil), a legally guaranteed minimum share that can be claimed even against the testator’s wishes.

Particularly in the case of real estate in an estate, tax treatment has become increasingly important. Those inheriting or bequeathing property should therefore always consider substantive inheritance law together with the related inheritance and income tax implications.

Bequeathing, gifting, or selling real estate to children

The transfer of real estate—whether through inheritance, gift, or sale to children—is subject to a variety of legal and tax regulations. While the basic mechanisms are similar, the specific tax details can be decisive in each case.

Inheritance of real estate

Without a will, the rules of statutory succession apply. Real estate then typically passes to multiple heirs simultaneously and becomes part of a community of heirs (Erbengemeinschaft). To avoid conflicts, a clear allocation through a will or inheritance contract is often recommended, for example:

• Assigning a specific property to one child

• Providing compensatory payments to siblings

• Establishing detailed rules for the use and management of the property

These measures can help limit lengthy disputes within the community of heirs.

Gifting real estate (anticipated inheritance)

Gifting a property during one’s lifetime is a key instrument in succession planning. A major advantage lies in the use of personal tax exemptions, which are renewed every ten years. This is particularly relevant for transfers to children, where high exemptions apply.

At the same time, these exemptions are increasingly coming under scrutiny because property values have risen significantly in many regions, quickly reaching taxable thresholds. Additionally, income tax considerations are gaining importance. Following the Federal Fiscal Court (BFH) ruling of September 26, 2023 (Az. IX R 13/22), it is clarified that the purchase of a share in an estate (Erbengemeinschaft) for consideration does not cause the estate property to be treated as newly acquired for income tax purposes. The ten-year period under § 23 EStG continues to refer to the original acquisition by the decedent. Therefore, anticipated transfers and subsequent sales should always be considered together.

Gifting with reversion clauses, usufruct, and right of residence

In practice, real estate is often not completely transferred but conveyed with reserved rights. Common examples include usufruct, a lifetime right of residence, or reversion clauses for specific cases such as death, insolvency, or divorce of the recipient.

These arrangements are generally permissible and serve as an important tool to maintain economic security and prevent unintended shifts of wealth. However, structures involving reserved rights and liabilities, such as encumbrances with loans, are closely examined by tax authorities and courts. Gifts with usufruct, right of residence, or reversion clauses should therefore be carefully structured both legally and for tax purposes, as even small details can determine whether and to what extent gift tax is incurred.

Selling real estate to children

Another option is selling the property to children or other direct-line relatives. An important point here: sales between direct-line relatives—parents, children, grandchildren, upward or downward—are exempt from real estate transfer tax. This can save a substantial sum, as the tax can reach up to 6.5% of the purchase price depending on the federal state.

The purchase price can be structured so that children do not pay it all at once but repay the parents in regular installments. Such annuity models can provide parents with an additional income source in retirement. The tax treatment of these payments depends on the specific structure and should be reviewed individually.

For sales, the so-called speculation period is also relevant. Gains from the sale of private real estate are generally taxable only if less than ten years have passed between acquisition and sale, with certain exceptions for owner-occupied property. The aforementioned BFH ruling IX R 13/22 provides relief for estates. When an heir acquires the shares of co-heirs and later sells a property belonging to the estate, the acquisition of the heirs’ shares does not trigger a new ten-year period. The original acquisition by the decedent remains decisive, which in many cases results in income tax relief.

Outlook

Valuation, exemptions, and the treatment of real estate in the context of inheritance and gift tax continue to be discussed politically and legally. Owners and heirs should not view their planning as a one-time decision but review it regularly to ensure it aligns with current legal and tax frameworks. This helps keep property within the family estate while avoiding unexpected tax burdens.