Disposal – ground lease granted free of charge

A gain from the sale of a private property

may be subject to income tax under Section 23 of the Income Tax Act if the property was acquired within the 10 years preceding the sale. In principle, a heritable building right is also deemed to be “real property” in this sense. If the heritable building right is initially created (free of charge) and sold together with a building constructed on it at a later date, the question arises as to whether this transaction can be taxed as a private sale transaction.

In contrast

The Federal Fiscal Court has ruled on the opinion of the tax authorities that (alone) the creation of a heritable building right (in return for ground rent) does not constitute an “acquisition” and therefore does not fall under the provisions of Section 23 of the German Income Tax Act (EStG). Since the building constructed by the heritable building right holder as a result of the subsequent development is also not to be included in the sale transaction, a profit from the sale of the “developed” heritable building right would remain tax-free.

It should be noted that this does not apply if a hereditary building right with an erected building is acquired (against payment); in this case, there is basically an acquisition within the meaning of Section 23 EStG, so that income tax may arise in the event of a subsequent sale within 10 years.

(Further comments & information on this can be found in our information letter 06/2018 under item 5.)