Introduction
Those who transfer real estate to the next generation during their lifetime often reserve a right of usufruct for themselves. The transferor can then continue to use the property themselves or—depending on the terms of the arrangement—rent it out and keep the rental income. This arrangement is also often attractive from a tax perspective: The value of the usufruct generally reduces the taxable value of the gift and can thereby significantly lower the taxable acquisition value. The Munich Fiscal Court has ruled on the extent to which this value can be further reduced due to the property’s diminished marketability in the case of a co-ownership share encumbered by a usufruct.
Facts of the Case
A father gifted his son one-third of a property that included a residential building comprising three separately usable apartments. He reserved a lifetime usufruct over the property. The tax office initially assessed the tax value of the transferred share at approximately 2.0 million euros.
During the legal proceedings, the son submitted a market value appraisal. The appraiser valued the entire property at approximately 6.1 million euros and then took into account several factors that reduced the value: a discount due to the co-ownership share, the usufruct, and an additional flat-rate discount because a share encumbered by usufruct is more difficult to sell and finance. As a result, the appraisal arrived at a value of approximately 940,000 euros. The tax office did not accept the additional percentage discounts. The dispute thus did not center on whether the usufruct affected the value, but rather on whether, in addition to taking it into account, flat-rate market discounts could still be applied.
Appreciation
The Munich Fiscal Court ruled that, in principle, proof of a lower value through a market value appraisal is also admissible for a transferred co-ownership share. This is important in practice: Taxpayers are not limited to the tax office’s standard value but may, pursuant to § 198 of the Property Valuation Act (BewG), demonstrate a lower fair market value if a professionally prepared appraisal provides verifiable evidence of it.
However, the court did not recognize the two additional discounts of 20 percent each. The court held that the decisive factor for the valuation is the price that the property as a whole would command in the ordinary course of business. In the court’s view, a flat-rate discount solely because only a co-ownership share was transferred does not reflect the typical real estate market. Accordingly, the court also did not consider an additional discount justified due to the reduced marketability of a property encumbered by a usufruct. The practical implication: An economic disadvantage does not automatically result in a separate percentage discount on the valuation.
The court, however, did factor the usufruct itself into the market value determination as a value-reducing element. It set the value of the share at approximately 1.494 million euros—significantly less than the approximately 2.003 million euros stated in the original assessment notice, but more than the 940,000 euros estimated in the appraisal report. The difference stems from the fact that the court took the usufruct into account via the relevant factor in the market value determination but eliminated the two flat-rate market adjustment deductions. An additional deduction for the same usufruct in the subsequent gift tax proceedings was precluded under § 10(6), sentence 11, of the German Inheritance Tax Act (ErbStG). Thus, the usufruct may not be applied twice to reduce the value.
The Fiscal Court granted leave to appeal. The matter is now pending before the Federal Fiscal Court under case number II R 11/26. A ruling by the highest court is therefore still pending; the opinion of the Munich Fiscal Court has not yet been conclusively confirmed.
Conclusion
A usufruct can significantly reduce the tax value of a real estate transfer while also ensuring the donor’s financial security. However, anyone who wishes to claim a lower value under § 198 of the German Property Valuation Act (BewG) should have the appraisal reviewed to verify the valuation methodology and the specific rationale for each individual deduction. According to a ruling by the Munich Fiscal Court, flat-rate deductions based on co-ownership or reduced marketability may be rejected, while the usufruct itself may still be taken into account as a value-reducing factor. In practice, a sound appraisal report should ideally be available as early as the objection proceedings: In the case in question, the plaintiff had to bear the procedural costs despite partial success because he had not submitted the appraisal report until the litigation phase. (Munich Fiscal Court, Judgment of March 24, 2026 – 4 K 927/24; appeal pending before the Federal Fiscal Court, II R 11/26.)
