Concept of "property" for the family home benefiting from inheritance tax relief

The tax-free transfer of the family home to closest relatives during lifetime or on death has always been significant, particularly in times of high real estate values. If children and descendants of deceased children acquire the family home by inheritance, the relevant tax exemption under Section 13 (1) No. 4c of the German Inheritance Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz; ErbStG) applies only insofar as the testator lived there until death or was prevented from such personal use for compelling reasons, the child moves in immediately after the death, and the living area does not exceed 200 sqm. Whether and under what conditions several cadastral parcels (Flurstücke) can be privileged for inheritance tax purposes was decided by the German Federal Fiscal Court (Bundesfinanzhof; BFH) in its decision of June 17, 2026 (case no. II R 27/23).

Simplified facts

A father who died in 2020 bequeathed several cadastral parcels to his son. Five of these had been combined in the land register into a single property pursuant to Section 890 of the German Civil Code (Bürgerliches Gesetzbuch; BGB). The local tax office for valuation purposes within the meaning of Section 152 (1) No. 1 of the Valuation Act (Bewertungsgesetz; BewG) treated three of these five parcels — the one with the residential building and the ones used as garden and access-way parcels — as a unit for inheritance tax purposes in a determination notice because, in its view, they formed an economic unit within the meaning of Section 70 BewG. It determined a total value for these three parcels, but added in the informational section of the determination notice that the tax exemption under Section 13 (1) No. 4c ErbStG might possibly be granted only for the family home on the one parcel. The inheritance tax office followed the latter approach, even though the garden and access-way areas located on the two other parcels were used together with the family home. The BFH concluded differently.

BFH decision

The concept of "property" used in Section 13 (1) No. 4c ErbStG must be interpreted under valuation law rather than civil law. This, however, does not follow from the mere wording of the provision with reference to Section 181 (1) Nos. 1 to 5 BewG, according to which the tax exemption applies, among other things, to single-family houses — such as the testator’s. The provision does not determine to what extent the land belonging to the house is included in the relief.

The purpose of this tax exemption provision leads to the valuation-law interpretation: as "property" the economic unit within the meaning of Section 2 (1) BewG is to be regarded, the land value of which the local tax office determines separately for inheritance tax purposes and which (in that respect only) constitutes a property within the meaning of the Valuation Act. Several cadastral parcels that are used jointly — as in the present case a residential building with adjacent garden or an access way — can therefore be jointly the basis for the tax exemption if they are determined to constitute an economic unit.

The tax office had argued in the concrete dispute that including garden and access-way parcels used with the residential building in the tax exemption could lead to possible division, partial sale or other development by the acquirer at any time and thus to possible abuse of the exemption. The BFH countered this with reference to the so-called recapture rule in Section 13 (1) No. 4c sentence 5 ErbStG. According to that rule, the tax exemption is retroactively forfeited if the family home — in the present dispute the economic unit or individual one of the three parcels — is used for other than personal residential purposes within ten years after acquisition.

Notice:

If heirs wish to challenge a determination of the tax-exempt property that is "unfavorable" for inheritance tax purposes, legal remedies must already be filed against the determination notice of the local tax office. For it is already here that the "extent of the property" is fixed with binding effect. Objections raised only in the subsequent inheritance tax procedure remain unsuccessful in the course of this two-stage procedure.