This must be taken into account when inheriting a property

The most important tax aspects when inheriting real estate

Anyone who owns an asset such as real estate can decide whether to bequeath it to their relatives after their death or to transfer it to them as a gift during their lifetime. Which option is chosen often depends on tax considerations.

If you inherit your house, you can dispose of it freely until your death and bear the running costs until then. A change of ownership, including a transfer of all rights and obligations, only takes place upon the death of the testator. If there are multiple heirs, a last will can specify who should receive the property. If there is no written last will, legal succession applies. The extent to which taxes are incurred depends on the degree of relationship to the heirs and the applicable tax allowances.

In principle, every heir must pay the inheritance tax. However, there are set allowances that do not have to be taxed.

• Spouse: 500,000 euros
• Children: 400,000 euros
• Granddaughters and grandchildren: 200,000 euros or 400,000 euros if the parents have died

The amount of taxes to be paid depends on the amount of the inheritance and the degree of relationship. In tax class 1, an inheritance up to 75,000 euros incurs 7% tax, an inheritance up to 300,000 euros 11% and an inheritance up to 600,000 euros 15% tax. In tax class 2 it is 15% up to 75,000 euros, 20% up to 300,000 euros and 25% up to 600,000 euros. Unmarried partners fall into tax class III with high rates starting at 30%.

If you inherit your house during your lifetime, it is called a gift. Whether a gift tax applies depends on the degree of relationship between the person giving the gift and the person receiving the gift. In most cases, the rates and allowances do not differ from inheritance tax. But there are three special features:

• There are no pension allowances (§ 17 ErbStG)
• It is not possible to make a tax-free gift of owner-occupied property to children. The allowances must be taken into account here, which are often exceeded.
• Parents, grandparents and great-grandparents belong to tax class 2 and not to the cheaper class 1. The tax allowance is 20,000 euros and not 100,000 as in the case of an inheritance.

Heirs with debts

It is often the case that heirs not only receive the property and other assets, but also debts and other liabilities. This is problematic because it is not possible to simply select the good assets and reject the bad ones. Whoever decides to inherit assumes full responsibility. For example, if you inherit current loans, you also have to service them.

It should be noted that you only have six weeks to decide whether to decline your inheritance. The deadline begins as soon as you find out about the death of the testator. If there is a will or an inheritance contract, the deadline runs from the time the disposition is opened. If you miss it, it means that the inheritance is automatically accepted.

It is therefore important to obtain the most important information as quickly as possible. The main thing here is the value and possible uses of the house. Heirs are entitled to request an extract from the land registry office. From this you can see whether the property is encumbered with land charges or mortgages. Further information on balances and rental income can be obtained from the testator's bank. What is necessary for this is a power of attorney, a power of attorney for health care or a notarized will. It is also important to get a precise overview of the structural condition of the building. For example, it is important to check whether the heating, insulation, roof and walls are in good condition or whether there is a need for expensive renovation. Based on all this data, the market value can be determined and you can see whether taking on the inheritance is worth it.

The possible uses also play a role here. For example, do you want to live in the house yourself, sell it or rent it out? Depending on the situation, it may also be worth taking over a house if it is encumbered. One way to refinance is, for example, by collecting rent.

The community of heirs – a typical challenge

It is not uncommon for there to be not just one heir, but a heterogeneous community of heirs. This could be, for example, four siblings, but also a stepmother and a child. Regardless of the actual relationship, people who inherit together form a community of heirs. Every single heir inherits everything. The heirs can only act together. The problem, however, is that the heirs usually have different interests, which is why there are often conflicts. This is the case, for example, if someone wants to stay in the house, someone wants to rent it out and someone wants to sell it. If no agreement is possible, a partition auction will ultimately occur, which is often the most unfavorable solution for everyone involved.