“Inheritance Tax Exemption for “Family Home”:

“Immediate” self-use by heirs in case of extensive repair work.”

The inheritance of a property used by the testator himself (apartment, single-family house) to the surviving spouse or to children is subject to special tax protection. The acquisition is regularly exempt from inheritance tax if the heir also lives in the so-called family home for at least 10 years after the death of the testator.

In this context, it can be problematic if the heir (e.g. daughter or son) has to extensively renovate or refurbish the inherited home before he can actually move into the family home. The law stipulates here that the property must be “immediately intended for own use for own residential purposes” by the purchaser.

Immediacy is regularly present in the case of a move-in within 6 months after the inheritance. After the expiry of this period, in order to claim the benefit, the acquirer must credibly demonstrate the date on which he/she decided to use the home as a family home, the reasons why it was not possible to move in earlier and that he/she is not responsible for the delay. Exceeding the 6-month period due to renovation work on the apartment can only be harmless under special conditions, e.g. if there is a serious defect that is only discovered during the renovation.

The Münster Fiscal Court has clarified in this regard that the use for own residential purposes must actually be implemented; a mere dedication for own use is not sufficient. The fact that in the case in dispute the son of the testator early on used individual rooms of the inherited semi-detached house located next to his apartment for storage purposes during the renovation work was not recognized by the court as an actual move-in. Even an undoubtedly existing intention of self-use (as even established by the court in the case in dispute) cannot replace actual use.

On the question of the renovation/restoration measures, which in the case of the ruling lasted almost 3 years – in this case, drying work was also carried out – the tax court ruled that the heir was to be blamed for having “not asked for and applied a quicker possibility” to dry out the house and, moreover, for having “accepted” the tense order situation of the contractor commissioned. The court concluded that the purchaser could not show that he was not responsible for the delay and denied a tax exemption for the family home.

Following this ruling, it is likely to be difficult – particularly in the case of a longer period of time between the inheritance and the move-in – to prove that the cause of a delay in moving into the apartment due to renovation work is not within the purchaser’s sphere of influence. An appeal has been filed against the ruling of the Münster Fiscal Court; it remains to be seen whether the Federal Fiscal Court will confirm the high requirements.

In order to obtain the tax exemption, it is recommended to document the undertaken renovation steps – from the planning to the beginning as well as the course of the construction measures – as carefully as possible and thus, if necessary, to make it credible that the delays are not self-inflicted.