Private Sale Transaction after Divorce

Income from private sales transactions within the meaning of Section 23 of the German Income Tax Act (EStG) exists if real estate is sold for which the period between acquisition and sale does not exceed ten years. This does not apply to real estate that was used (exclusively) for own residential purposes in the period between acquisition and sale or in the year of sale and in the two preceding years (Section 23 (1) Sentence 1 No. 1 Sentence 3 EStG). The question of when a property is used for own residential purposes, which is highly contentious in practice, was also the subject of the ruling of the German Federal Fiscal Court of February 14, 2023 (Case No. IX R 11/21).

In the case in question, a married couple acquired a property with a single-family house in 2008, each with half co-ownership, and lived there together with their son until the husband moved out in 2015. The marriage was divorced in 2017. As part of the subsequent notarized divorce settlement, the divorced husband sold his half co-ownership share to his divorced wife and realized a capital gain from this, for which he claimed tax exemption pursuant to Section 23 (1) sentence 1 no. 1 sentence 3 EStG. The tax office did not accept this claim, as the family home was no longer used for his own residential purposes after the separation-related move-out; the facts of a private sale transaction were therefore fulfilled. The tax court of first instance and the German Federal Fiscal Court took the same view.

The relevant requirement for the requested tax exemption of use for one’s own residential purposes is that the property is inhabited by the taxpayer; it is harmless if the taxpayer inhabits the property together with members of his or her family or a third party. However, a property is not used for the taxpayer’s own residential purposes if the taxpayer leaves the property to a third party, either for a fee or free of charge, without inhabiting it himself or herself at the same time. If, however, the taxpayer leaves the property to a child entitled to child benefit free of charge for partial or sole use, this is attributed to the owner as his or her own use, because it is incumbent on him or her within the scope of his or her obligation under maintenance law to provide for the accommodation of the child. However, in the case of simultaneous use by a third party - such as the child’s mother in the case in question - there is no preferential use by the taxpayer for his own residential purposes.

With regard to the case in question, the sole residential use of the divorced husband’s one-half co-ownership share by his son, who was nine years old at the time of the move-out, contradicts the reality of life. Rather, it must be assumed that the child lived in his mother’s household after his father moved out and that the disputed half co-ownership share was left to both of them. The German Federal Fiscal Court also emphasizes that the two co-ownership shares of the divorced couple can neither be specified in concrete terms nor can they be linked to a specific use. Thus, after the divorced husband moved out, the divorced wife inhabited the entire former family home together with her son and not only the co-ownership share attributable to her. Such use by the divorced wife cannot be attributed to the divorced husband as owner-use and was ultimately harmful for the requested tax exemption. The fact that the divorced wife looked after the minor child was irrelevant.