The most important tax issues when selling an inherited house

• Selling the inherited house is often the best solution.

• Members of a community of heirs must agree on a joint course of action.

• Speculative tax may be payable on the sale of inherited property.

• Speculation taxes can be avoided in various ways.

• Speculation tax can pass from the testator to the heir.

You have inherited a house - now what?

If you inherit a property, the question arises as to what should be done with the house or property. Only in a few cases do heirs move in directly. If you rule out owner occupation, you essentially have two options:

• You can rent out the property, which involves a lot of expense in the long run.

• The usually better option is to sell the inherited property at the best possible price.

Selling an inherited house: These taxes apply

If you decide to sell the inherited house, you may have to pay the following taxes to the tax office:

Inheritance tax

Inheritance tax may also apply to real estate above a certain value, although there is an individual exemption amount in each case. In Germany, inheritance tax is regulated by the Inheritance Tax and Gift Tax Act.

Inheritance tax is not based on the amount of the entire estate, but on the amount received by the heir. Exactly how much it is depends on your degree of kinship, the corresponding tax bracket and the property value. The following tax-free amounts apply:

• For the wife or husband as well as a registered civil partner, it is 500,000 euros that remain tax-free on the inheritance.

• For children and grandchildren, this applies up to 400,000 euros.

• For other relatives, for example parents, grandparents, siblings, nieces and nephews, the tax-free amount is up to 100,000 euros.

• Persons who are not related have an allowance of up to 20,000 euros.

To calculate inheritance tax, you need, among other things, the market value of the property - i.e. its current value on the real estate market. This often requires an expert opinion.

Speculation tax

If inheritors have inherited a house and wish to sell it, a so-called speculation tax may also apply. With regard to the domestic real estate market, this tax is primarily intended to prevent the purchase and sale of real estate within a short period of time for the purpose of speculation.

The speculation tax is an income tax on private sales transactions. In Germany, this mainly applies to real estate. The tax is calculated on the increase in value of the property. It is due if the house or land has increased in value between purchase and sale. However, there are numerous exceptions to speculation tax. If you have inherited a house and want to sell it, this is a special case.

The amount of speculation tax as income tax depends on various factors. In addition to the personal tax rate, these include the purchase and sale price of a property. The prerequisite for incurring the corresponding taxes is whether and to what extent you have generated a profit through the sale.

The basis for the calculation is the purchase price or construction price of the property and all ancillary costs. These include costs such as land transfer tax, notary fees or financing costs.

How to avoid paying tax on the sale of inherited property

Under certain circumstances, you can sell the inherited property without having to pay tax to the tax office. To do so, certain requirements must be met and specified deadlines must be observed in each case. In order not to restrict the sale of a house, the legislator has laid down numerous exceptions:

• No profit is made on the sale of the property: speculation tax does not apply if you do not make a profit on the sale of the house. The same applies if you even have to sell the inherited house at a loss.

• The speculation period has already expired: The speculation tax on real estate does not apply if the so-called speculation period has expired. This period differs depending on the use of the building and depends on a fixed period.

• Profit from house sale is below the tax-free amount: There is an annual tax-free amount on all sales. If you sell the property as the only taxable disposal item and the sales price is below 600 euros, there is also no speculation tax. Of course, this will occur extremely rarely in practice.

Speculation periods for the tax-free sale

There are various speculation periods in connection with speculation tax. If you adhere to these deadlines, the speculation tax will not apply at all when you sell. The case of inherited real estate is again a special case, as the deadlines do not begin at the time of inheritance. The start of the period depends on the original acquisition of the property or, in the case of new buildings, on the date on which the testator moved in. Inheritors always take over deadlines that are already running from the testator.

The speculation tax on real estate is also not required if the house or flat has been held for a certain period of time. A general period of ten years between the purchase and sale of the property applies here.

If testators acquired the property before this period or if there are at least ten years between purchase and inheritance, inheritance tax does not apply. If, for example, only six years have passed since the purchase of the property, this period is credited to the heirs. In this case, they would have to hold the property for at least four more years to reach the ten years for the tax-free sale of the property.

Inheritance versus gift - only rarely do different taxes apply

Relatives often transfer real estate such as houses or flats to their descendants during their lifetime in the form of a gift. Whether a house is bequeathed or given away makes hardly any difference in Germany in terms of tax law, apart from a few special cases.

The gift tax due is usually the same as inheritance tax. The same applies to any tax-free amount, depending on the relationship. The rules on speculation tax also apply to donated real estate, just as they do to inherited real estate.

The speculation periods, such as the period of three years for owner-occupied real estate or the period of ten years for a rented property, also apply here. These also do not only begin with the gift, but already with the time of the original purchase by the donor.

This is why property valuation is important

If you want to sell an inherited house, determining the property value is important for several reasons:

• You should know the exact value of the property in order to determine a suitable selling price. Inherited properties are often offered at too low or high a price. The latter prevents a timely sale after the inheritance.

• As already mentioned, if you determine the current property value, you can also better estimate the amount of any speculation tax that may be due. Important decisions, such as selling the house within the speculation period or holding the property until the expiry of the period, can be made more easily this way.

• In addition, there are rarely disputes among co-heirs afterwards about the sale price of the property if the exact property value is known.

How to determine the property value before selling the house

The value of a property depends on numerous factors. These include:

• Type of property

• Year of construction

• Location of the property

• Size of the property

• Condition of the house

• Equipment

An online calculator provides an initial indication of how the property value should be assessed. Afterwards, an expert estate agent can determine the exact market value on site. A more accurate valuation of the property by professionals provides certainty in the sale and helps to determine the price together.

Conclusion: What is more worthwhile - selling an inherited house or using it for other purposes?

Especially in the case of a community of heirs, there are often several opinions or ideas about the future use of the inherited property. You have the option of occupying the building yourself, renting it out or selling it.

Use the inherited house yourself

Heirs can continue to use the house. This is always a good idea if the beneficiaries of the inheritance have their centre of life near the inherited property anyway. Often, this is a prerequisite, for example, so that commuting to work can continue to be managed without problems. In addition, the property must meet personal requirements and needs.

If there are several heirs in the form of a community of heirs, the procedure is often more difficult. This is because not everyone is in a position to pay the co-heirs accordingly. In addition, not everyone in the community of heirs may agree to a monthly rent payment. In that case, selling the house is often the better option.

Renting out an inherited house

An inherited property can be rented out just like other properties. This is particularly suitable for properties that the testator has already rented out. Here it is advantageous if a permanent tenancy already exists.

On the other hand, renting out a house used by the testator himself or herself often goes hand in hand with far-reaching investments. What used to be sufficient in terms of furnishings and comfort often no longer corresponds to the current state of the art. The tastes of future tenants are also often different. Therefore, the investment is not always worthwhile. In addition, many older single-family houses in particular have a poor rental yield.

Selling an inherited house

Selling an inherited house is often the most sensible option. The property often finds buyers for whom it would be worthwhile to renovate the building for owner-occupation.

In this way, you usually receive a large amount of money that can be put to good use. In the case of communities of heirs, the sale of the property also offers many advantages. There are fewer disputes and the sum for the sale of the house can be divided exactly among the heirs and devisees.

In contrast to renting, there are also no far-reaching obligations. In addition, the sale of the inherited house is often accompanied by a higher profit compared to a long-term rental. This circumstance is especially true with regard to single-family homes, which are particularly often part of an inheritance. In this context, the payment of speculation tax as part of the house sale can often be avoided by acting wisely.