Inheriting property tax-free and with legal certainty

What tax can apply when inheriting property? 

When you inherit a property, inheritance tax may be due, depending on the value of the estate and your relationship to the deceased. To find out how much tax applies, which allowances are available and when you must notify the tax office of the inheritance, see our guide toinheritance tax.

Other costs when inheriting property 

Besides any inheritance tax, further costs can arise when administering an estate. If a certificate of inheritance (Erbschein) is needed as proof of entitlement, the fees are calculated according to the value of the estate and the Court and Notary Fees Act (Gerichts- und Notarkostengesetz); depending on the case, these can vary considerably. Correcting the land register, on the other hand, is free of charge if the application is submitted within two years of the death.

When is inheriting property tax-free? 

There are two main ways for beneficiaries to inherit a property tax-free: Through the personal tax allowance, or through the special rule for the family home. Both options are explained below.

Tax-free inheritance of the family home 

The German Inheritance and Gift Tax Act (Erbschaft- und Schenkungsteuergesetz, ErbStG) contains a special tax exemption for an owner-occupied home. Under certain conditions, the family home can be transferred to a spouse tax-free, or partially tax-exempt when inherited by children.

A property qualifies as a family home if it is a built-on plot of land within the EU or the European Economic Area (EEA), is wholly or partly owned by the person transferring it, and is used by that person as their own home.

Transfer during the owner's lifetime: A tax-free lifetime transfer is possible only to a spouse, with no minimum holding period or other restrictions. Investments in maintenance or extensions are also tax-exempt.

Inheritance after death: If the owner dies, the surviving spouse must then live in the property themselves for at least ten years. If they move out earlier without a compelling reason, the tax exemption is withdrawn retroactively. The same ten-year rule applies if children inherit the family home. In addition, the exemption is capped at a living space of 200 square metres.

For further details on the requirements, tax classes and allowances, see our guideInheriting property: What you need to know.

Allowance for inherited property 

If the value of the inherited property is below your personal tax allowance, no inheritance tax is due. The allowances depend on your relationship to the deceased – ranging from EUR 500,000 for spouses to EUR 20,000 for more distant heirs. For a full overview of the allowances, see our guide toinheritance tax.

Gifting property instead of bequeathing it 

If you own several properties, transferring individual assets during your lifetime can bring a tax advantage. The key benefit: the gift tax allowance, which is the same amount as for inheritances, is renewed every ten years.

To safeguard your own interests, you can set out a right of residence or a usufruct right in the gift deed. A right of residence guarantees you the right to live in the property for life. A usufruct right goes further: It also allows you to let the property. A registered usufruct right also reduces the assessed value of the property, which can be useful when making use of allowances.

Please note: If less than ten years pass between the gift and the death of the donor, the gift may be taken into account when calculating anyclaim to a compulsory portion.

Selling a property and passing on the proceeds 

Rather than bequeathing or gifting a property directly, selling it can also be a sensible option, particularly for high-value properties. The sale proceeds can then be gifted within the scope of the available allowances. Part of the proceeds can also be used to provide for your own retirement. This also helps you avoid the formation of acommunity of heirs, which can lead to conflict where interests differ.

If you are considering selling a property in order to pass on the proceeds, the Engel & Völkers team can support you throughout the entire process – from valuation and marketing to signing the contract.

Conclusion: Saving tax through the right planning

There are several ways to pass on a property with as low a tax burden as possible – whether as a family home, through allowances, or via a forward-looking gifting strategy. Which approach is right depends on the individual case. Early planning is worthwhile in every case, both for the tax burden and for keeping peace within the family.