Time and again we receive enquiries as to whether the sale of a property triggers any tax. The correct answer to this is: “It depends.” We show you here what it depends on. Not only are land sales subject to income tax if they are sold within ten years of acquisition (private sales transactions), but also land sales if there is commercial land trading. In principle, real estate transactions are tax-exempt if the time span between acquisition and disposal is more than ten years. Within ten years, a small number of disposals are taxable as a private disposal transaction, provided there is no owner-occupation.
A larger number of disposals may constitute commercial property trading. This arises when
- participation in general economic traffic takes place,
- there is sustainability and
- private asset management is exceeded.
A commercial enterprise is suspected if the following indications apply:
- more than three objects
- Sale within five years (close temporal connection between purchase, construction and sale)
However, if more than three properties are sold, this leads to the commercial nature of all properties sold (including the first three) and thus to tax liability.
Unfortunately, indications have it that there are special features in this regard.
The top ten flags for taxable property trading
Every residential property under civil law that can be used and sold independently constitutes a counted object (also the garage in part ownership).
Properties used for own residential purposes are not objects within the meaning of the three-object limit.
The five-year limit is not a rigid limit. Commercial property trading may exist, for example, if there is a higher number of disposals after the expiry of this period, but also in the case of a full-time activity in the construction sector.
After exceeding the five years, properties can only be counted up to the upper time limit of ten years if further circumstances justify the conclusion that there was an intention to sell at the time of construction, acquisition or modernisation (burden of proof lies with the tax office).
Also, properties acquired more than ten years ago are generally not included. This was confirmed by the BFH in a ruling from 2017, in which it had referred to private sales transactions, because this standard arguably contains the “recognisable valuation of the legislator that, in the case of a holding period of more than ten years, the sale of properties after a holding period of more than ten years is – at least in principle – of a private nature”.
Commercial real estate trading is given if it was already certain at the start of the activity in question that the expected positive overall result could only be achieved by including the proceeds from the sale of the leased property.
Caution should be exercised in the case of properties that have been modernised to a not inconsiderable extent prior to the sale and if this has resulted in an asset of a different marketability. In these cases, the five-year period begins with the completion of the refurbishment work. The property is only then deemed to have been acquired at that time.
Two properties can also lead to commerciality if the business concept consists of acquiring real estate, renting it out in the meantime and then reselling it. An indication of this can be short-term financing.
Does your activity correspond to the activity of a property developer in terms of its economic core? Commercial property trading!
Exceeding the “three-object limit”, on the other hand, may be harmless if the seller himself rents out a residential property on a long-term basis – for more than five years.
Conclusion: A tax liability can be affirmed very quickly. Each case can be different and lead to a different assessment.
Therefore: Please ask us first. If too many properties have been sold, it is difficult, if not impossible, to recover them, because then the burden of proof that there is no commercial property trading lies with you.