Pension-based purchase

Annuity-Based Purchase - An annuity-based purchase is a special form of real estate acquisition in which the buyer pays the purchase price not as a lump sum, but in regular installments over an extended period of time. Ownership of the property is generally transferred to the buyer upon the conclusion of the contract and registration in the land registry.

How It Works and Contractual Structure

In a purchase on an annuity basis, the purchase price is divided into recurring payments made to the seller monthly, quarterly, or annually. The term and amount of the installments are agreed upon individually and recorded in the notarized purchase agreement. As with any real estate purchase, notarization is required by law.

To protect the seller, a so-called real encumbrance is entered in the land register. The real encumbrance obligates the respective owner of the property to make regular payments of the agreed installments, regardless of whether the property is resold. Additionally, a right of withdrawal for the seller may be agreed upon, which takes effect if the buyer defaults on payments. This right of withdrawal is typically secured by a priority notice of rescission in the land register.

A key feature of a purchase on an annuity basis is that ownership transfers to the buyer upon entry in the land register. From that point on, the buyer may use, rent out, or make structural changes to the property. The seller retains only the contractual claim to the installment payments, secured by a real encumbrance.

The tax treatment is complex: The buyer can immediately depreciate the property, while the seller must pay taxes on the installment payments as recurring income. A portion of the installments can be classified as interest, which has tax implications for both parties.

Distinction from a Life Annuity

An annuity-based purchase is often confused with a life annuity, although the two models differ in one crucial respect. In an annuity-based purchase, the annuity payments are limited to a fixed period, such as 15 or 20 years. The total amount of the installments is thus fixed from the outset and corresponds to the agreed-upon purchase price plus an interest component.

With a life annuity, on the other hand, payments are made until the seller’s death. The total cost to the buyer is uncertain here and depends on the seller’s life expectancy. The life annuity thus carries a financial risk for the buyer, while a purchase on an annuity basis offers a predictable total cost.

Value Protection for Installments

An important aspect that is often overlooked: Without a value protection clause, the purchasing power of the installment payments diminishes over time due to inflation. With a contract term of 20 years and an average inflation rate of 3%, the loss of purchasing power for the final installments amounts to nearly half of the initial value. We therefore recommend always including a value protection clause in contracts for annuity-based purchases that links the installments to the Consumer Price Index (CPI) of the Federal Statistical Office. This protects both buyers and sellers from inflation-related surprises.

Practical Tip for Nuremberg and the Metropolitan Region

In the Nuremberg metropolitan area, annuity-based sales are particularly relevant for older homeowners who wish to sell their property but still require a regular income. This model is occasionally found with single-family homes in neighborhoods such as Nuremberg-Eibach, Zirndorf, or Schwabach, where property values allow for a reasonable installment amount.

We recommend that both parties have a professional appraisal conducted before entering into such a contract and discuss the tax implications with a tax advisor. Additionally, the installment amount should be linked to a value protection index to offset the loss of purchasing power over the term of the agreement. The Consumer Price Index from the Federal Statistical Office is the standard benchmark for this purpose. If needed, we coordinate with an experienced notary in the region who is familiar with such special arrangements.

Frequently Asked Questions About Annuity-Based Purchases

Who is an annuity-based purchase suitable for?

This model is suitable for buyers who cannot obtain or do not wish to obtain full bank financing, and for sellers who prefer regular payments rather than a one-time purchase price. Typical scenarios include sales within the family or between parties with an existing relationship of trust, as the model carries a certain risk of default.

What happens if the buyer defaults on payments?

If the buyer falls behind on installment payments, the seller may, depending on the contractual agreement, demand late payment interest, enforce the real estate lien, or withdraw from the contract in the event of significant arrears. If a priority notice of reversion is entered in the land register, the seller may demand the retransfer of the property. Installments already paid will then be offset in accordance with the contractual provisions.

Does the real estate transfer tax have to be paid immediately?

Yes. Real estate transfer tax is calculated on the full purchase price and is due immediately upon receipt of the tax assessment notice, regardless of the installment payments. In Bavaria, the tax rate is 3.5 percent. The transfer of ownership in the land register takes place only after the tax office’s clearance certificate has been submitted, i.e., after full payment of the real estate transfer tax.

Can the seller demand early payment of the installments if they need liquidity?

Generally no-the purchase agreement bindingly stipulates the installment payments. However, the seller may assign their right to the installments or use them as collateral, provided this is not contractually excluded. Some contracts also provide for a special right of termination in favor of the buyer, who, if financially capable, can pay off the remaining debt early-which then means a lump-sum payment for the seller.

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