Child allowance (gift)

Child Allowance (Gift Tax) refers to the personal tax exemption available under German gift tax law to children from their parents when assets-including real estate-are transferred. This allowance amounts to €400,000 per parent and child and can be claimed again every ten years. It is one of the most effective tools for anticipated succession and makes it possible to transfer real estate assets to the next generation tax-free over several decades.

Legal Basis and Amount of the Exemption

The child exemption for gift tax is regulated in § 16 of the German Inheritance Tax Act (ErbStG). It applies equally to inter vivos gifts and to inheritances. For children (biological and adopted) with respect to each parent, it amounts to €400,000; with respect to both parents together, therefore, €800,000. For grandchildren whose parent has already passed away, an exemption of €400,000 also applies; if the parents are still alive, the exemption for grandchildren is only €200,000. The exemptions apply in the relationship between two individuals and can be utilized anew every ten years.

Gifting Real Estate to Children - Process and Valuation

When gifting real estate, the tax-assessed property value (according to the German Property Valuation Act, BewG) is used as the basis for calculating gift tax, not the market value. This value is determined using the income approach or the simplified asset value method and is often lower than the actual sales price. If the property value is below the exemption limit, the gift is completely tax-free. If it exceeds this limit, gift tax is levied on the excess amount. For an owner-occupied family home, an additional full tax exemption applies if the child lives in the house for ten years.

Planning Strategies for Anticipated Succession

Significant tax advantages can be achieved through an early and phased transfer. Classic strategies: (1) Transfer in installments over several ten-year periods; (2) Granting a right of usufruct to the parents, which reduces the transfer value and secures the parents’ interest in the property; (3) Transfer to multiple children, if there are several; (4) Utilization of the additional family home privilege for owner-occupied residential property.

Calculation Example: Tax Exemption Optimization Over Two Ten-Year Periods

A family owns a multi-family home with a taxable property value of €1,400,000, which is to be passed on to three children. If both parents are included as donors, an initial total of 6 × €400,000 = €2,400,000 in tax-free allowances is available (three children each compared to one parent each). The entire estate can thus be transferred completely tax-free if the transfers are coordinated and, if necessary, spread over two periods (today and in ten years).

If only one parent is the owner and there is one child, a €400,000 tax-free allowance is available. With a property value of €700,000, a gift tax-free transfer of up to €400,000 would be possible in the first ten-year period; gift tax would apply to the remaining €300,000. Alternatively: Transfer a partial share (e.g., 50%) today (value: €350,000, within the exemption limit) and the second half after ten years have elapsed, when the exemption limit becomes available again.

Usufruct as a Supplementary Tool

Particularly effective is the combination of the gift with a reserved usufruct: The parents transfer ownership of the property to the child but retain the lifelong right to use the property or receive the rental income. The usufruct right reduces the gift tax value of the transfer because the capital value of the usufruct is deducted from the market value. A 65-year-old father with monthly usufruct income of €2,000 has a usufruct capital value of approximately €280,000 based on a statistical multiplier under the Property Valuation Act (BewG)-the tax-relevant transfer value thus decreases by this amount.

Practical Tip for Property Owners in Nuremberg and Franconia

In Nuremberg and Franconia, many families have built up real estate assets over decades that are now to be passed on to the next generation. With the child allowance of €400,000 per parent and child, entire properties can often be transferred tax-free, especially in regions with moderate price levels. In Nuremberg neighborhoods with moderate prices (e.g., Langwasser, Gebersdorf, Worzeldorf), condominiums are often still in the range of €250,000-€380,000-well within a single allowance.

We recommend addressing succession planning early on and developing the optimal strategy together with a tax advisor and notary. Every transfer is unique-property value, number of children, parents’ age, and personal circumstances determine the optimal structure. At my-home.de, we assist with property valuation and are available to advise you on gifting structures.

Frequently Asked Questions

Can I gift a property to my child tax-free, even if I still live there?

Yes, if you reserve a right of usufruct. You can transfer ownership but retain the right to continue using the property yourself. The usufruct reduces the tax value of the gift and can significantly reduce or even eliminate gift tax.

What happens if the child sells the gifted property within ten years?

For gift tax purposes, a subsequent sale initially has no effect-the tax exemption remains in place. However, if the property is sold within the ten-year capital gains tax period, income tax may be due on the capital gain if the child has not lived in the property themselves. For a family home, the requirement for personal use applies for ten years; otherwise, the tax exemption is retroactively revoked.

Does the child allowance also apply to adopted children and stepchildren?

Adopted children receive the same allowance as biological children (€400,000). Stepchildren (children of the spouse who have not been adopted) are treated as children under the Inheritance Tax Act and also receive an allowance of €400,000.

Does the gift of real estate have to be notarized?

Yes, the gift of real estate must be notarized (§ 311b BGB in conjunction with § 518 BGB). Without a notary, the gift is invalid and cannot be executed. The notary also arranges for the transfer of title in the land register and notifies the tax office, which then conducts the gift tax audit. Real estate transfer tax does not apply to gifts between relatives in the direct line (parents-children).

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