How a Federal Fiscal Court Ruling Eases Property Transfers Within the Family

A German property owner looking to pass a multi-family house from the 1970s to one nephew and two nieces can now do so with much greater tax certainty. The owner, in his mid‑50s, wants to keep receiving a regular income from the property while avoiding inheritance and gift taxes on the transfer. A recent decision by the Federal Fiscal Court (BFH) has opened a clear, tax-efficient path: an interest-free sale with deferred payment.

Under this model, the uncle sells the house at its full market value — estimated at €280,000 — to the three younger relatives, but the purchase price is not paid upfront. Instead, it is spread over, for example, 20 years through interest-free instalments. Because the property has been held as private wealth for more than ten years, any capital gain on the sale is entirely tax‑free. The BFH ruling now also confirms that the interest saved by the buyers is not treated as a taxable gift and that the instalments themselves contain no hidden taxable interest component, as had long been assumed by the tax authorities.

The structure solves two problems at once: the uncle secures a steady stream of payments throughout his retirement, while the nieces and nephew acquire the property gradually without an immediate tax liability. Even during the payment period, the new owners can claim depreciation on the building and deduct related expenses against rental income, further improving their net return.

Behind the BFH Decision: What It Changes for Interest-Free Instalment Sales

Why the BFH Ruling Matters

For years, tax offices routinely treated part of every instalment under a zero‑interest deferred sale as a notional interest payment. That fiction not only created taxable income for the seller but also raised gift‑tax issues. With its new judgment, the BFH has dropped that interpretation: so long as the purchase price is genuinely interest‑free and not structured as a life annuity, no taxable interest arises. The interest advantage for the buyer is also not considered a taxable gift.

Who Gains from This Decision

The ruling directly benefits families who want to keep property within the extended family but face low gift‑tax allowances. Nieces and nephews, for instance, are entitled to only a €20,000 tax‑free allowance under German inheritance and gift tax rules — far less than the allowances for children. By using a sale at market value rather than an outright gift, they avoid triggering that low allowance entirely on the transfer date. Instead, the purchase price creates a liability that is gradually settled, reducing the eventual taxable estate.

The Risk of Pre‑Arranged Forgiveness

A critical warning emerges from the expert analysis: any prior agreement that the remaining purchase price will be waived in the future could be treated by the tax authorities as a gift made today, triggering immediate taxation. Therefore, while the uncle might choose to forgive portions of the debt every ten years — making use of the €20,000 per‑person allowance — such forgiveness must remain a genuine, unplanned decision at the time it is granted.

A Practical Blueprint for Transferring a Rental Property Without Heavy Taxation

Based on the case example and the BFH ruling, a workable structure for the owner of the €280,000 property could follow these concrete steps:

  • Sell at full market value. Agree on a total price of €220,000 after an immediate gift of €20,000 to each of the three relatives (total €60,000), using their personal allowances. This reduces the tax‑base immediately.
  • Interest‑free deferral. Stretch the remaining price over 20 years without charging interest, matching the BFH‑approved framework. An annual payment of €11,000 covers the full amount within two decades.
  • Exploit depreciation. The new owners can depreciate the building portion of the acquisition cost and claim related rental expenses, effectively reducing their taxable rental profit from day one.
  • Plan liquidity from rents. If the nieces and nephew currently lack cash, the rental income from the three‑unit building should cover the annual instalments, making the transfer self‑financing.
  • Consider flexible payments. The instalment plan can be adjusted to rise after ten years, for example when the uncle enters retirement and needs higher monthly income.
  • Avoid pre‑arranged debt forgiveness. Do not contractually promise to waive the remaining balance later; keep any future waiver a purely voluntary decision, ideally timed at ten‑year intervals to use renewed allowances.