The gifting of an encumbered property does not constitute a sales transaction
Generally, in the case of gifting where the consideration is below the fair value, a distinction must be made between the remunerated and non-remunerated portions for tax purposes. Recently, the tax court in Lower Saxony had to decide whether the gift of a property encumbered by a loan could, wholly or partially, constitute a taxable sales transaction.
In the case in question, in 2019, a father had transferred to his daughter a property that had been acquired in 2014 for €143,950. The daughter assumed the loan that was still outstanding in the amount of €115,000. For the purpose of the income tax assessment, the local tax office divided up the partially remunerated transfer in accordance with the ratio between the fair value and the outstanding part of the loan that was assumed and included a taxable private capital gain for the claimant.
The legal action was successful. The tax court in Lower Saxony, in its ruling of 29.5.2024 (case reference: 3 K 36/24, appeal pending before the Federal Fiscal Court: case reference: IX R 17/24), decided that the partially remunerated transfer of the property by way of accelerated inheritance does not constitute a taxable private sales transaction. Private sales transactions are increases or reductions in value that have been realised from relatively short-term sales transactions involving properties held as private assets. In the case of a transfer of a property by way of accelerated inheritance there is however no ‘realised capital gain’. In fact, a notional gain was taxed and this is not permissible. On the day before the transfer in 2019, the claimant had a property for which he had paid an overall amount of €143,950 in 2014. The property was still encumbered by €115,000. On balance, the portion of the property that was unencumbered was €28,950.
