Disposal in the case of property transfer with loan assumption

In its decision of December 12, 2023 (case no. IX R 15/23), the German Federal Fiscal Court (BFH) recently decided that in the case of a partially paid transfer of assets held as private assets (at that time GmbH shares held as private assets), a division into a fully paid and a fully free part must be made according to the ratio of the consideration to the market value of the asset. In its decision dated March 11, 2025 (case no. IX R 17/24), the BFH confirmed this approach in the context of a private sale transaction relating to a property (Section 23 of the German Income Tax Act; (Einkommensteuergesetz, EStG), in which the new owner had assumed the debts encumbering the property and the consideration was therefore below the historical acquisition costs.

In 2014, the father purchased a property for around EUR 144,000 and partially financed it with borrowed funds. In 2019, he transferred the leased property - whose value had risen to EUR 210,000 - to his daughter. She assumed the financing liabilities of EUR 115,000 existing on the transfer date. Based on the market value at the time of the transfer and the liabilities assumed, the tax office divided the transaction into a paid (approx. 55%) and a free (approx. 45%) part. In view of the transfer within ten years of the original acquisition, it taxed the part for consideration as a private sale transaction and assessed the corresponding income tax against the father.

The tax court had agreed with the father. On the one hand, transfers of a property for partial consideration below the historical acquisition costs were not disposals within the meaning of Section 23 EStG. On the other hand, the assumption of liabilities by the acquirer does lead to acquisition costs; however, by way of teleological reduction, the transfer for partial consideration by way of anticipated succession should be excluded from the scope of Section 23 EStG, as transfers below the historical acquisition costs do not lead to any realized and therefore taxable increase in value.

The BFH took a different view. If an asset is transferred and associated liabilities (in the case in dispute amounting to EUR 115,000, approx. 55% of EUR 210,000) are assumed at the same time, the amount of these liabilities constitutes a sale price and therefore, as a rule, a transaction for consideration. Regarding the remaining value of the transferred property - in the case in dispute in the amount of EUR 95,000 (approx. 45% of EUR 210,000) - it is a transaction without consideration. In the case of such a transfer for partial consideration, an apportionment is correctly made according to the ratio of the consideration to the market value of the transferred asset; the acquisition costs are also apportioned according to the “consideration ratio”. The paid part is subject to taxation as such: If the property - which is leased to a third party, as in the case in dispute - is transferred within ten years of acquisition, the transaction is subject to income tax as a private sale transaction. The acquisition free of charge is not taxable due to the lack of a sale price. In this respect, the legal successor assumes the (historical) acquisition costs of the legal predecessor.

The BFH also expressly applied this approach to the facts of the case at hand, in which the assumption of liabilities by the daughter as legal successor was below the historical acquisition costs of the father as legal predecessor. In the area of private sales transactions, there are also no indications of (artificially) generating tax-relevant losses in the case of a mixed gift. The BFH did not see any scope for the teleological reduction of Section 23 EStG in such cases cited by the tax court due to the lack of a hidden or unintended loophole, especially because the provision expressly regulates both acquisitions for consideration and free of charge.

The BFH also rejected the double taxation of the identical facts with income tax and inheritance or gift tax assumed by the tax court for a mixed gift. This is because a mixed gift must also be divided under inheritance and gift tax law: The assumption of liabilities is deemed to be a transaction for consideration; the liability assumed is deducted from the taxable acquisition. This means that the acquisition of assets for consideration is not subject to taxation due to a lack of enrichment. As a result, only the gratuitous part of the legal transaction is included in the gift tax assessment basis. However, this is not subject to income tax.