What applies to the purchase of shares in a community of heirs with real estate?

Profit on the sale of privately held real estate is generally taxable if the purchase and sale take place within a ten-year holding period (so-called "speculation period"). This topic is often the subject of differences between taxpayers and tax authorities and ultimately of decisions by the tax courts.

Recently, the Bundesfinanzhof (BFH, Federal Fiscal Court) had to decide whether the ten-year holding period was breached in a case in which a co-heir acquired the shares of his co-heirs in the community of heirs and sold the property belonging to the community of heirs after a short period of time (ruling from 26.09.2023 - IX R 13/22).

The tax office regarded the acquisition of the co-heirs' inheritance shares as an acquisition transaction within the meaning of Section 23 para. 1 sentence 1 no. 1 German Income Tax Law (EStG) and subjected the profit from the sale of the property, which was sold one year later, to income tax.

The BFH rejected this view. In doing so, it not only turned from its previous case law, but also contradicted the tax authorities in their letter of the Federal Ministry of Finance (BMF) dated March 14, 2006 on the income tax treatment of the community of heirs.

The BFH justified its ruling as follows.

The taxability of private sales transactions requires the "identity" of the asset acquired and the asset sold. Criteria such as similarity, functional similarity and equivalence of the purchased and sold asset are decisive.

It therefore had to be decided whether the acquisition of a share of the community of heirs is to be identical with the (proportionate) acquisition of the assets in the community of heirs (in this case the real estate). The BFH denied this. The joint participation in a community of heirs is not a participation in the assets in the community of heirs and therefore not a participation in the property of the community of heirs. According to the BFH, this applies even if only real estate is held in the community of heirs. If a co-heirs´ inheritance share is acquired and the real estate held by the community of heirs is sold within the ten-year period, the asset acquired and the asset sold are not identical as required by law.

The BFH also clarifies that although the share in a community of heirs is a share in a joint ownership, the community of heirs does not constitute a partnership, so that the provision of Section 23 para. 1 sentence 4 EStG, which also applies the ten-year holding period to the purchase and sale of shares in a partnership, does not lead to any other decision.

The BFH's decision is pleasing. However, it immediately raises questions about possible arrangements.

For example, is it possible to avoid capital gain tax by inheriting real estate which was acquired not longer than ten years ago not to the desired heir solely, but to a community of heirs consisting of the desired heir, e.g. with a 99.9% share alongside a co-heir at a 0.01% share, in order to enable the desired heir to sell his share in the community of heirs tax-free or is this an abusive arrangement within the meaning of Section 42 German Tax Code (AO)?

As the decision of the BFH also contradicts the current guidelines of the BMF, it remains to be seen whether or not it will be published in the Bundessteuerblatt (Federal Tax Publischment) and thus recognized by the tax authorities

If you have any questions about the BFH ruling and its possible and recognized structures in the area of succession planning, please do not hesitate to contact us at any time.