Two recent rulings by the Federal Fiscal Court (BFH) illustrate the complexity of distinguishing between asset management and commercial property trading, as well as the taxation of private property sales. On the one hand, the BFH clarifies the application of the so-called ‘three-property limit’ in relation to the extended trade tax relief for property companies. On the other hand, the BFH confirms the tax treatment of property transfers made partly for consideration – for example, where the recipient assumes outstanding loans – as a private disposal transaction within the meaning of Section 23 of the Income Tax Act (EStG).
This article therefore aims to provide an overview of the implications of the BFH’s rulings on the sale of property and tax planning in relation to property transactions.
Trade tax: Extended trade tax relief for first-time property sales in the sixth year
In the appeal lodged by the tax office against the judgement of the Münster Finance Court, the Federal Fiscal Court (BFH) had to clarify whether the sale of a large number of let properties by a limited liability company (GmbH) in the sixth year following their acquisition still constituted preferential asset management or whether it already constituted or gave rise to commercial property trading (BFH, ruling of 20 March 2025 – Ref. III R 14/23).
In 2007, the year it was incorporated, the claimant GmbH had acquired thirteen plots of land, predominantly through external financing, and sold them in 2013 following the death of one of its managing directors. The question was whether the conditions for the extended trade tax relief under section 9(1), second sentence, of the Trade Tax Act (GewStG) were met, or whether the sale of the properties in the sixth year following their acquisition constituted commercial property trading and would therefore be subject to trade tax. This is because, in principle, so-called ‘real estate GmbHs’ benefiting from the extended trade tax relief are subject only to corporation tax plus the solidarity surcharge, totalling approximately 15.8 per cent.
The prerequisite for claiming the extended reduction is that the company exclusively manages and utilises its own real estate. If the activity crosses the line from pure asset management into commercial activity, the tax relief is excluded. The so-called ‘three-property limit’ serves as a distinguishing criterion: if at least four properties are sold within a short timeframe (usually five years between acquisition and disposal), it is presumed – subject to rebuttal – that an intention to sell, at least in a conditional sense, already existed at the time of acquisition.
The Federal Fiscal Court (BFH) ruled that, given the specific circumstances of the individual case, the activity should not be classified as commercial property trading and the extended trade tax relief should be granted if, within the five-year period, neither property disposals nor preparatory measures for such disposals take place, and only in the sixth year is a double-digit number of properties sold. The conditions for claiming the extended trade tax relief must not be assessed solely on the basis of the three-property limit. Rather, as part of a case-by-case overall assessment, taking into account all relevant objective circumstances and by way of circumstantial evidence, it must be examined whether the activity still constitutes asset management or whether the threshold for commercial activity has already been crossed (e.g. advertising measures, the production of prospectuses, etc.).
The Federal Fiscal Court (BFH) emphasises the importance of a case-by-case, holistic assessment rather than rigid thresholds. Merely exceeding or falling short of the three-property limit is therefore not sufficient as a decisive criterion for or against the existence of commercial property trading. Rather, the decisive factor remains the examination of the objective circumstances as a whole.
Income Tax: Capital Gains on the Transfer of Land for Partial Consideration
In its judgement of 11 March 2025 (Ref. IX R 17/24), the Federal Fiscal Court (BFH) had to clarify how the transfer of assets for partial consideration is to be treated under Section 23 of the Income Tax Act (EStG). In tax law, a transfer is said to be ‘partially for consideration’ where the consideration paid for the acquisition of an asset is clearly below the market value of the asset in question.
In 2014, the plaintiff, a father, purchased a developed plot of land for EUR 143,950.00, partly financed by external borrowing, which was let out. In 2019, he transferred the let property to his daughter, who took over the outstanding loan of EUR 115,000.00. As a result of significant increases in value, the market value of the property had already risen to EUR 210,000.00 at the time of this alleged gift. The tax office classified the transaction as a partially private disposal under Section 23(1), first sentence, No. 1 of the Income Tax Act (EStG), insofar as the transfer was made for consideration.
The Federal Fiscal Court (BFH) ruled that a taxable private disposal transaction occurs if a plot of land is transferred within ten years of its acquisition and the new owner assumes the debts encumbering the land, in this case bank loans. The assumption of debts in connection with the acquisition of an asset constitutes consideration for valuable consideration. The transaction is divided into a part involving valuable consideration and a part without valuable consideration. The amount of the liabilities as at the date of transfer is decisive for determining the proportion of the transaction involving valuable consideration.
Conclusion
The Federal Fiscal Court’s rulings make it clear that distinguishing between asset management and commercial activity in property disposals, as well as the valuation of partially remunerated transfers, requires a nuanced assessment of the overall circumstances. Therefore, any planned property disposal should be carefully examined from legal, economic and tax perspectives.
