Anyone planning to pass on the family home during their parents’ lifetime need not fear the increased inheritance tax. With five rules, he usually inherits completely tax-free.
Although many real estate heirs are expecting a reform of inheritance tax law from January 1, 2023, which will significantly increase their tax liability, tax expert Christopher Riedel still believes it is possible to hand over the family home to the next generation with little burden. “The inheritance tax creates problems in individual cases,” says Riedel. “But the legislature does provide some means of alleviating the problems or avoiding them altogether through long-term planning.”
Riedel gives five tips that prospective heirs can use to reduce the tax burden. They help lower the appraised value of the family home and make effective use of tax credits.
The rule change greatly increases the inheritance tax payable for some heirs. An example: Let’s assume that the tax office has so far estimated the value of a parent’s house with land at 500,000 euros. If a child is to inherit the house, this would have to be taxed on an additional 100,000 euros minus the tax allowance for children of 400,000 euros. With a tax rate of seven percent, this makes 7,000 euros.
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From 2023, the tax office will multiply the house value in many areas by a higher number. “The exact amount depends on the provisional material value and the standard land value,” explains Riedel. “The higher the standard land value, the higher the value number.”
If the house in our example is in an expensive area, the material value factor could be 1.5. The estimated value increases from 500,000 euros to 750,000 euros; the inheriting child has to pay tax of 350,000 euros less the allowance and pays 52,500 euros in the higher tax class at a tax rate of 15 percent. More than three times as much as in 2022 and much more difficult to handle.
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There are also detailed changes in the law. So far, the Treasury calculated real estate with a useful life of 70 years. This will increase to 80 years from 2023. A house that can be used for ten more years is worth more. This also increases the tax burden.
The new value calculation is forcing even more property owners to plan the transfer of the family home for the long term. If they fail to do so, they often force their heirs to choose between indebtedness and sale. Riedel: “The earlier families plan their inheritance, the better it is.”
The first step in this planning is to consider the area where the parents live. It decides whether the house is valued at all according to the declared real value method, explains Riedel: The tax office only uses this if the actually preferred comparative value method cannot be used in a region or municipality.
The comparative value method determines the value of a property by comparing it to similar houses or apartments. If an identical apartment in an apartment building was sold for 500,000 euros, the value of the apartment given away or inherited is in a similar range, including adjustments for condition and special facilities.
Because there are often no comparable sales in rural areas, the law provides for the material value method as an alternative to the comparative value method. This evaluates real estate according to age, size and condition.
Prospective heirs should therefore first check whether the amendment to the law affects them at all. “The smaller the place, the higher the probability that the data for the comparative value method is missing,” says Riedel. “They definitely exist in Munich, Berlin and Düsseldorf.”
If you live in a metropolitan area, you don’t have to rush to the notary this year to bequeath the family house according to the old rules. Little will change for him after the New Year.
Even if you live in an area without comparable prices, you don’t have to fear a completely exaggerated valuation of your house, emphasizes Riedel: The calculation bases used in the real value method have often resulted in values below the actual market value. Anyone who had the family house appraised using the real value method paid less tax than someone whose comparable house was appraised according to the comparative value. The new law aims to align both values.
So houses in the country are now taxed higher, but arguably closer to actual value than above.
Anyone who thinks the tax office values their property too expensive can also commission an appraisal. “If the expert determines a lower price than the real value method, the tax authorities have to create it,” explains Riedel. The only disadvantage: the appraiser is paid by the family. You should therefore be sure that the order is worthwhile.
Once the value of the family home has been determined, families transfer it as tax-efficiently as possible by using the allowances that apply to inheritances and gifts: 500,000 euros for spouses, 400,000 euros for children, 200,000 euros for grandchildren.
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Riedel explains three basic rules to help families use the allowances most effectively:
Let’s take a house worth a million euros as an example this time. If a parent bequeaths the house to a child, the child has to pay tax on an additional EUR 600,000 minus the tax-free allowance of EUR 400,000 and pays EUR 90,000 to the tax authorities.
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However, if the family uses the allowance twice because they divide the house between the parents, distribute it between two children or transfer part of the house to the child at an early stage, the child only pays tax on 200,000 euros and also falls into a lower tax class. The tax burden drops to 22,000 euros – less than a third of the starting value.
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Anyone who then gives away the family home while they are still alive and agrees on a usufruct or right of residence for the parents kills two birds with one stone:
According to Riedel, the younger the parents are, the more worthwhile is an expert report on the property value in the case of usufruct and right of residence reservations. “Appraisers lower the value of a usufruct property because they can factor in more risks than the Valuation Act. The possibility of residents living much, much older than statistics predict, for example.”
The usufruct hardly poses any tax risks. If the parents move out at some point or die, the heirs only have to pay additional taxes “in extreme cases”, explains Riedel. For example, if both parents between the ages of 30 and 50 die within nine years of the donation, the tax authorities only assess the usufruct on the basis of its actual term, which then leads to an additional tax payment. Such cases are likely to remain exceptions.
Let’s stay with the example from the previous section: If the family not only uses the tax allowances twice when passing on the one million euro house, but also grants the parents a right of usufruct, this would only have to reduce the value of the taxable gifts by 200,000 euros, so that she can pass the house on to the next generation tax-free. This usually works even when the parents are already retired, and saves the recipient the gift tax completely.
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As tempting as tax savings may be, Riedel advises families not only to think about money when planning their inheritance. “The exciting question is: do I want to give up my property at all?” Especially when it comes to the last house people live in, it is important for many to remain the owner until the end. Sometimes it makes sense to pay more taxes. Riedel: “Talk to your tax advisor. He helps you with these decisions.”
