Giving away your own home to children: Those who use allowances can often transfer their house tax-free

Created: 03/12/2022, 07:00

By: Dieter Tannert

There are currently calls for an increase in the allowances for inheritance and gift tax.

If you act in a planned manner, there is often no tax.

The discussion about increasing the allowances for inheritance tax is currently gaining momentum.

A number of politicians are calling for this to be increased.

This is all the more urgent since a new valuation method will come into force at the turn of the year, subjecting higher values ​​to the tax.

The Federal Ministry of Finance hastily declared that the adjustment of the assessment was due to the order of the Federal Constitutional Court.

The values ​​must therefore be determined realistically, otherwise the tax could be unconstitutional.

To put it simply, if a share portfolio that is easy to value can be valued with its specific value on a certain day, it is not permissible to value a property only with an estimated value that deviates too far from the market level.

Giving away your own home should be well planned.

© Jan Woitas/dpa

The tax exemption for inheritance and gift tax is basically the same

The assessment of taxes in the case of inheritance or gifting is regulated in Germany in the same law.

In the event of an inheritance, there are even more tax relief than in the area of ​​donations, which can ultimately be planned.

The allowance for children is EUR 400,000 and can be used by either parent for each child.

Example:

Father and mother own a house, which both parents own equally, worth 800,000 euros.

The house can be transferred to the only child tax-free (father's allowance 400,000 euros and mother's allowance 400,000 euros).

If there are several children, each child is entitled to an allowance of 400,000 euros for the father and mother.

If the father and mother own a house in equal shares worth 1.6 million euros, the house can be transferred tax-free to two children in equal shares.

Create the conditions for tax exemption

However, if the house is owned solely by one parent, this can quickly lead to a tax, since only one parent is then entitled to an allowance.

For example, if a father wants to give away the house as a gift to the only child, there is only an allowance of 400,000 euros.

In this case, however, one can proceed to first giving away part of the house to the spouse, so that later on a further allowance of 400,000 euros is available for the gift to the child.

The previous gift of the family home from one spouse to the other is completely tax-free.

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Allowances can be used again and again

However, the existing allowances of over 400,000 euros for each child and each parent cannot only be used once.

To put it simply, everything that has been given away in the last 10 years is added up at the time of the donation.

Here it can make sense not to give away a valuable house in its entirety, but only a part of the house that corresponds to the allowance of 400,000 euros.

After another 10 years, another share of the value of the house can be transferred to the children tax-free within the scope of the allowance.

Example:

Father and mother own a house, which they both own equally, worth 3.2 million euros.

The house is to be given away to the two children.

As a first step, the parents can give away half of the house, worth 1.6 million euros, to the two children tax-free.

After a further 10 years, the first donation is no longer to be taken into account and the allowances are available again.

This means that the house, valued at 3.2 million euros, was completely donated to the two children after a period of 10 years, tax-free.

Pay less tax through planning

By being able to recognize the tax burden, a tax can often be avoided.

A good example is the €3.2 million house that can be gifted to two children tax-free over a 10-year period.

According to the last available wealth report from the German Bundesbank from 2017, one belonged to the 5% richest Germans if a person had net assets, including owner-occupied real estate, worth 898,400 euros.

The sooner you start transferring wealth to the next generation, the less tax is due on it.

So if you own assets that exceed the allowances of the heirs, you should consult a tax advisor.

Here it can also be discussed which methods can be installed for one's own safety, so that one's own child does not later throw them out on the street.