Give away the house during your lifetime
Many reasons prompt seniors to give away their house already during their lifetime. Some just want to save inheritance taxes for their children, others need money to live on. The thought that the house will have to be sold because there is no money for care also prompts seniors to give away their house to future heirs. It is important for almost all seniors to remain in their familiar surroundings.
Donation, giving with a warm hand
Giving away a house or land requires certain formalities and has wider effects that need to be considered .Giving away a house or land requires certain formalities and has wider effects that need to be considered.
Form and consequences of the transfer
There are no regulations regarding the form and content of a care directive. A letter that can be clearly assigned to you with the following content is sufficient:
"I want to be cared for by Mr. Müller (exact data), but under no circumstances by Mrs. Maier (exact data)".
Of course, this presupposes that Mr. Müller knows exactly what you want. It makes more sense if you specify exactly how you want to be looked after; the more precise, the better. Mention where and how you want to live and which medical interventions you allow. You can also mention very mundane everyday things, for example, that godchildren should receive a present at Christmas or how the grave of your deceased partner is to be cared for.
The signature, place and date are important so that it is clear that a care directive is to be valid. Unlike a will, there is no obligation to handwrite the document. A notary is not required for a care directive, even if decisions are to be made about real estate.
Important: Ultimately, however, it is the guardian who decides whether to comply with your wishes.
Tax implications
The donee may have to pay gift tax. Therefore, a gift must be reported to the tax office. The tax office usually estimates the market value of the property as a gift on the basis of comparable properties. The value stated in the gift contract is irrelevant. However, it is possible to significantly reduce gift tax through a property valuation. The appraisal must, of course, stand up to critical scrutiny.
Close relatives have an allowance for gift tax. You can transfer up to 500,000 euros tax-free to spouses and registered partners. For children the tax-free amount is 400,000 euros and for grandchildren 200,000 euros. If, for example, you want to give your son-in-law a house worth 300,000 euros, chain gifts make sense. First you give it tax-free to your daughter, who in turn gives it tax-free to her husband. In the case of a direct gift to the son-in-law, more than 20,000 euros in gift tax will be due.
A registered usufruct also reduces the gift tax, because usufruct reduces the value of the house. It is even possible for the donee to claim tax benefits. If you take over an encumbered property and rent it out, you can deduct the interest accruing on the loan from your taxable income, provided you rent out the house.
You can claim the above-mentioned allowances every 10 years. The 10-year period also has an effect on inheritance tax and on the assumption of care costs.
You can claim the above-mentioned allowances every 10 years. The 10-year period also has an impact on inheritance tax and on the assumption of care costs.
What happens when there is no money for care costs
The idea of signing over a house to children is obvious if there is a risk that high care costs cannot be paid from current income or other assets. However, there is no point in signing over the house if the need for care has already arisen. The social welfare offices can fall back on gifts that date back less than 10 years. Children rarely have to pay for their parents' care from their own income. Since the beginning of 2020, children are only obliged to do so if their annual gross income exceeds 100,000 euros.
In the case of a donation within the last 10 years in an emergency, for example the parents cannot afford the care costs, the social welfare office can realise the donated house.
What is the effect of the gift in the case of inheritance?
The tax office always assesses all property transfers within a period of 10 years together. In other words, it adds up the amounts you give and bequeath to a person during this period. If the above-mentioned allowances have been exceeded, inheritance tax is due on the share that exceeds this allowance.
Example: You have a son who is the sole heir to whom you give various valuable gifts.
| Was | Wert | Wirkung |
|---|---|---|
| Gift of cash assets 15 years ago | 50,000 € | Remains unaccounted for |
| House depreciated 8 years ago | 230,000 € | Remains unconsidered |
| Share gift 3 years ago | 170,000 € | Will be taken into account |
| Estate (shares, jewellery, cash) | 120,000 € | Will be taken into account |
| Anzurechnen | 520.000 € | |
| deductible allowance | - 400.000 € | |
| To be taxed | 220,000 € | About 13,000 € Inheritance tax |
A gift can also have consequences under inheritance law (link to inheritance text I am writing). Insofar as there are several heirs, only some of whom have received clearly valuable gifts, compensation claims by the disadvantaged heirs are possible. As a rule, gifts that are out of the ordinary are regarded as anticipated inheritance. A dowry, maintenance payments in education and similar gifts are not taken into account. The transfer of a house without any conditions, for example to take care of it, will always be taken into account when calculating the inheritance share or the compulsory share. But here, too, a ten-year time limit applies.
An exception applies to the so-called claim for supplementary compulsory portion. The longer the gift dates back, the lower the claim. In the case of a gift up to 5 years before death, only 60% of the value is to be taken into account. After more than 10 years, the gift does not increase the compulsory portion.
Important: In the case of a gift with usufruct, beneficiaries of the compulsory portion always have a claim to a supplement to the compulsory portion (BGH, judgement of 27 April 1994, file no. IV ZR 132/93), even after 10 years have elapsed.
Sale, cash to live on
You may want to sell the house in order to enter a new phase of life with the money collected. Unless it is a multi-family house, further use is usually only possible if close relatives buy the house.
Formalities required
Under certain circumstances, a right of first refusal must be observed, but otherwise you are largely free to draw up the contract. Of course, it must be notarised by a notary public.
Important: As with a gift, you must ensure that a valid right of residence or usufruct is agreed.
What taxes are due
If you make a profit on the sale, you have to pay tax on it. But there are two exceptions:
1. more than 10 years have elapsed between the purchase of the house and its sale.
2. you have used the house exclusively for your own residential purposes for the past two years.
If one of the two conditions applies, you are exempt from speculation tax.
There are also exemptions from the real estate transfer tax to be paid by the buyer. If you sell to first-degree relatives, i.e. your spouse or partner or your children, they are exempt from tax.
The tax office does not necessarily set the agreed purchase price as the value, but determines the value according to the rules described for gifts].
Effects on the succession
The sale does not affect any inheritance issues. You are merely converting real estate into cash assets. However, if you sell far below the value, this can be considered a partial gift. The difference between the actual value and the purchase price may count as a gift with the effects on inheritance and compulsory portions already described.
Partial sale, simple but with pitfalls
At first glance, the numerous offers that are heavily advertised seem very attractive. You get plenty of cash and can continue to live in your house. But on closer inspection, it's usually not worth it.
You have to pay "rent" in the future and continue to be responsible for all repairs. Of course, the sellers don't call the monthly payments due rent, because you don't get a tenancy agreement and are not protected by residential tenancy law.
As a rule, the seller is left with a usufruct or a right of residence, for which a "monthly usage fee" or a "monthly usage charge" is payable. The more valuable the property sold is and the larger the share sold, the more has to be paid.
Calculation of the "rent
A typical offer from one of the companies that offer partial sales shows what sums you should expect. For a property worth 500,000 euros and a 23% sale, the payout is 100,000 euros. You will have to pay 200 euros per month as a user fee. The buyer keeps about 3 % of the purchase price for appraisals and fees.
Procedure of the partial sale
- You are looking for a seller who is willing to buy up to 70% of your house. Most companies buy a maximum of half of the property.
- The buyer makes a non-binding offer. If you like the offer, you move on to the next step.
- An independent appraiser prepares a valuation. On the basis of the appraisal, the buyer decides whether he wants to buy a share and, if so, how much. Most providers are only prepared to make a partial purchase if the payout sum is 100,000 euros or more.
- Now it is a question of the planned further use. As a rule, this is estimated on the basis of the seller's age.
- Now a binding offer is made. If you accept this, a notarised contract is concluded and you receive the agreed sum.
Partial sale from a tax perspective
The tax office does not distinguish between sale and partial sale. Therefore, the conditions mentioned in the section Sale apply.
Subsequent sale of the property
It can be expensive if you decide to sell your house completely at a later date. Let's say your house is now worth 600,000 euros and you find a buyer who buys it at that price.
You get 462,000 euros of it, because you only own 77% of the house. In addition, the partial buyer charges a fee ("execution fee", "settlement fee") of about 6 % of the complete sales price, i.e. 36,000 euros. If you sell the entire house 10 years after the partial sale, your balance sheet will look like this.
| What | Sale with partial sale | Sale without partial sale |
|---|---|---|
| Gesamterlös | 502.000 € | 600.000 € |
| Single intake | 100,000 € | 0 € |
| Payments ü over 10 years | - 24,000 € | 0 € |
| Gebühr at sale | - 36.000 € | 0 € |
| purchase price | 462,000 € | 600,000 € |
Repurchase or purchase by heirs
Older people like to consider a partial sale if the pension is not sufficient to maintain the accustomed standard of living and at the same time there is a desire to keep the property in the family. A later repurchase is therefore planned, or the heirs are to buy it.
As a rule, a right of first refusal is agreed upon by the seller of the share as well as the heirs in the case of a partial sale. There is an option to determine the conditions for this repurchase when the contract is concluded. As a rule, a new appraisal is necessary. In addition, a fee of about 6 % is charged.
What to consider
A partial sale is often the easiest solution if you want to continue living in your house and at the same time get money to live on. A loan from the bank usually costs less, but hardly any bank will grant a loan that you will probably not be able to repay during your lifetime.
All in all, raising capital through partial purchase is very expensive, as the following comparison shows.
Situation: A property worth 500,000 euros is mortgaged with 100,000 euros at 1.5 % and sold after 10 years at a price of 600,000 euros.
| Was | Darlehen |
|---|---|
| Gesamterlös | 585.700 € |
| Auszahlung | 100.000 € |
| Interest + Repayment | -24,000 € |
| Residual debt after 10 years | -90,300 € |
| Kaufpreis | 600.000 € |
A partial sale is particularly unfavourable if you intend to invest most of the money you receive in renovating the house. For example, you invest €100,000, which increases the value by a total of €150,000. 23 % (€34,500) goes into the coowner's coffers of the house. In contrast to traditional owners' associations, you alone pay all the costs incurred by the property.
Usufruct and right of abode
How usufruct or right of abode affects tax has already been mentioned. What is still missing is an explanation of the difference between right of abode and usufruct.
The lifelong right of abode, i.e. the right to use a flat or house for oneself, is granted by the owner of the property. It remains in force even if the house or flat is sold. Theoretically, it does not need to be in writing. But only a so-called right of residence in rem provides security in the event of a sale or inheritance, because it is entered in the land register. For this reason, a notarial contract is required.
The right of residence only includes the right to live. Similar to a tenancy, it depends on the exact wording of the contract. This determines, for example, whether you can take in a subtenant and what operating costs you have to pay. However, you always have the right to take in a partner or a carer if you need this help.
The right of residence is problematic if you can no longer use the flat or house. Your right remains, so the owner is not allowed to use the flat for other purposes if you have to go to a nursing home. On the other hand, you do not have the right to rent out the apartment and use the income.
That is the difference to usufruct. This also entitles you to rent out the living space or the house and live off the rental income. Usufruct should also be entered in the land register as a matter of principle.
Usufruct versus right of abode
Assume you have a detached house with a granny flat that is rented out.
| Was | Nießbrauch | Wohnrecht |
|---|---|---|
| Costs for energy, property tax | Usually you have to pay them. | Usually you have to pay them. |
| You give away the house | You get to live in the house and get the rent. | You get to live in the house, the recipient gets the rent. |
| You are moving out of the house | You can rent out your current flat and get both rents. | You retain the right to live in the house but are not allowed to rent it out. |
| You want to take in a subtenant. | Is usually possible, you keep both rents. | Depends on the contract. |
Include a clause that your right of residence expires as soon as you can no longer live in the house permanently. Otherwise you block a sensible use of the house without any advantage for you].
A word of advice in conclusion
Whether it is a partial sale, sale or donation with usufruct or right of residence, the subject is complex and very complicated. It is best to consult a lawyer and a notary, because these legal transactions must be carefully thought through and adapted to the individual case.
