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Certified Tax Advisor, Lawyer, Director, National Office Tax & Legal
Consultant, National Office Tax & Legal
The acquisition of domestic property or a heritable building right thereto by means of a purchase agreement is subject to real estate transfer tax, which is calculated based on the value of the consideration. In addition to the purchase price for the property, this also expressly includes – although without added value for the purchaser – any encumbrances on the property, insofar as these are transferred to the purchaser by operation of law and do not constitute permanent encumbrances (Section 9 (2) no. 2 sentences 1 and 2 of the German Real Estate Transfer Tax Act (GrEStG)). In its highly relevant decisions of October 22, 2025 (case no. II R 32/22 and II R 5/22) the German Federal Fiscal Court (BFH) clarified whether a personal residential building right and a personal, non-transferable and non-inheritable usufructuary right – each not yet registered in the land register at the time of acquisition – are to be viewed as burdens that increase the real estate transfer tax assessment basis.
In the proceedings II R 32/22 (“residential building right”) the plaintiff acquired – in simplified terms – a property with a two-family house on it by means of a notarised purchase agreement dated May 26, 2021. The seller's brother had already been granted a lifelong residential building right free of charge in a contract in 2003. Although the brother had applied for this to be entered in the land register on May 4, 2021, the entry itself was not made until June 4, 2021, i.e. after the purchase agreement had been concluded. The residential building right was therefore listed in the contract as an existing encumbrance on the land register without previous entry in the land register, which the purchaser also expressly accepted. When assessing the real estate transfer tax, the tax office included the value of the residential building right to the assessment basis in addition to the purchase price. The BFH ultimately agreed with this.
The transfer of the personal residential building right to the purchaser constitutes consideration within the meaning of Section 9 (1) no. 1 GrEStG, regardless of the fact that the residential building right was not effective at the time of acquisition due to the lack of an entry in the land register. Although the seller only had a contractual obligation, this was assumed by the purchaser in addition to the purchase price for the previously unencumbered property in accordance with the contractual agreements. The purchaser therefore did not exercise its right to unencumbered transfer under section 466 sentence 2 of the German Civil Code (BGB).
The BFH also confirms the inclusion of the capitalised annual value of the personal residential building right in the real estate transfer tax assessment basis. Such a residential building right tied to a person, which lapses upon their death, does not constitute a permanent encumbrance, but rather an encumbrance on the property within the meaning of Section 9 (1) no. 2 Sentence 1 GrEStG, insofar as it is transferred to the purchaser by operation of law. In this respect, it differs fundamentally from a transferable and inheritable permanent right of residence pursuant to Sections 31 et seq. of the German Condominium Act (WEG).
Notice
The term “permanent encumbrance” as used in real estate transfer tax law must be determined independently. In legal transactions, permanent encumbrances on the property which the respective property owner cannot expect to be removed in the foreseeable future are regarded as a permanent value-reducing feature of the property itself and are therefore not to be included as consideration in the real estate transfer tax assessment basis.
In the proceedings II R 5/22 (“usufructuary right”), the plaintiff acquired a heritable building right to certain properties by notarized purchase agreement dated March 26, 2015. In addition to paying the purchase price, the purchaser undertook to pay an annual ground rent. Years earlier, the seller had undertaken in notarized deeds to create a usufructuary right in favor of the property owner for the duration of the heritable building right to the apartments built on the heritable building plot. However, this had not yet been entered in the land register at the time of acquisition. Accordingly, the purchaser had undertaken to do so vis-à-vis the seller in the purchase agreement, whereupon the usufructuary right was entered in the land register after the heritable building right had been acquired. In this case, too, the tax office included both the purchase price and the respective capitalized annual value of the ground rent and the usufructuary right in the assessment basis for the real estate transfer tax to be assessed. The Fiscal Court and BFH concurred.
It was clarified by the highest court and was also undisputed in the case of dispute between the parties that, in the case of the acquisition of a heritable building right that is subject to a ground rent obligation, the real estate transfer tax basis is increased by the ground rent obligation capitalised over its agreed term in addition to the purchase price for the heritable building right. The claim of the person subject to the heritable building right is a right to recurring payments limited to a specific period within the meaning of section 13 (1) sentence 1 of the German Valuation Act (BewG), which must be assessed at its capital value.
In addition, however, the capitalized annual value of the usufructuary right must also be added to the real estate transfer tax assessment basis as other benefits received by the purchaser. Section 9 (1) no. 1 GrEStG is relevant in the case of a contractually agreed obligation to grant the property owner the usufructuary right. There was no exception under Section 9 (2) no. 2 sentence 2 GrEStG in the case in dispute; the usufruct did not rest on the property due to the lack of a real right at the time of conclusion of the purchase agreement on the heritable building right. Private law encumbrances on a property do not arise simply when the contracting parties reach an agreement, but only when the change in title is entered in the land register. The fact that the contracting parties had approved the entry in the land register but that this had not yet been made did not change this. Furthermore, the actual exercise of usufruct between the seller and the property owner in the past was irrelevant.
Notice
The BFH decisions show that, in the context of a property purchase, particular care is required in the case of existing rights of use, even if these are not entered in the land register at the time of acquisition, but that tax-reducing measures may also be possible. The highest court's clarification of the legal question of when these rights constitute a miscellaneous service or an encumbrance on the property (with an increase in the real estate transfer tax assessment basis) as opposed to a permanent encumbrance on the property (not included in the real estate transfer tax assessment basis) is to be welcomed.