Remuneration for waiving usufruct in the case of a leased property

According to section 24 no. 1 letter a) of the German Income Tax Act (EStG), income within the meaning of section 2 (1) EStG also includes compensation granted as compensation for lost or foregone income. A common application is the taxation of severance payments, which are paid, for example, as compensation for the loss of a job. However, other circumstances may also be affected by this provision, as shown by the ruling of the German Federal Fiscal Court (Bundesfinanzhof, BFH) of October 10, 2025 (case no. IX R 4/24) in the case of the sale of a leased property encumbered with usufruct.

Specifically, it had to be clarified whether the remuneration for waiving the exercise of a usufructuary right to a property belonging to private assets constitutes taxable compensation for lost income from renting and leasing in accordance with section 24 no. 1 letter a) in conjunction with section 21 (1) sentence 1 no. 1 EStG if the owner of the usufructuary right actually leased the property at the time of the waiver and generated income from renting and leasing as a result.

In the case in question, the plaintiff had a lifelong usufructuary right to a leased property. She generated income from renting and leasing from this. The owner was a community of heirs, which included the plaintiff’s children. As part of the sale of the property, the plaintiff waived her usufructuary right. She received compensation for this. In accordance with previous rulings by the BFH and the opinion of the tax authorities in the so-called usufruct circular, the plaintiff assumed that this compensation payment was to be regarded as a non-taxable asset transfer.

However, the BFH now takes a different view and considers compensation for lost income from renting and leasing to be payable to the owner of the usufructuary right. Accordingly, the compensation payment is taxable and must be allocated to rental income. This is because the compensation replaces the ongoing inflow of rental income that would have been received without the waiver.

The taxability of the compensation payment is also not precluded if the plaintiff voluntarily waived the usufructuary right. Contrary to earlier rulings by the BFH, it is no longer relevant that the taxpayer who receives compensation as compensation for lost or foregone income was under legal, economic, or factual pressure when concluding a corresponding agreement. This requirement was based on the consideration that the tax rate reduction applicable to compensation was only justified in cases where the taxpayer was in a coercive situation and could not avoid the concentrated inflow of income.

Whether the compensation payment is subject to tax rate reduction is still to be examined by the first-instance tax court in the second process. This presupposes that the income is “extraordinary,” i.e., that it is a combined income.

 

Notices: 

This ruling is of great practical significance, as case law and tax authorities had previously assessed situations such as this one differently. It can now be assumed that the waiver of a usufructuary right to a property leased by the owner of the usufructuary right in return for payment will result in taxable income under section 21 EStG. The decisive factor is that the usufructuary right generates income. The reaction of the tax authorities to this ruling remains to be seen. It cannot be ruled out that a transitional regulation will be enacted in this regard.

On the part of the owner, the transfer payments should (continue to) be classified as subsequent acquisition costs for the property (see BFH, ruling of June 26, 1991, case no. XI R 4/85, BFH/NV 1991, 681). However, this question was not the subject of the decision in the present case.