Right of usufruct

Right of Usufruct - The real right to make full use of another person’s real property, i.e., to live in it or to derive rental income from it, without being the owner. The right of usufruct is registered in Section II of the Land Register and is governed by §§ 1030-1089 of the German Civil Code (BGB).

What exactly does the right of usufruct mean?

The right of usufruct is a limited real right and goes well beyond a mere right of residence. While a right of residence (Section 1093 of the German Civil Code) permits only personal occupancy, usufruct entitles the beneficiary to derive all benefits from the property-including renting it to third parties and retaining the rental income.

In practice, usufruct is particularly common in cases of anticipated succession: Parents transfer ownership of a property to their children during their lifetime but reserve the right of usufruct for themselves. They can continue to live in the property themselves or rent it out and benefit financially as if they were still the owners. At the same time, the property is already transferred to the next generation for gift tax purposes-and the 10-year tax-free allowance begins to run.

Usufruct is always tied to a specific person and non-transferable (Section 1059 of the German Civil Code). It expires at the latest upon the death of the beneficiary and cannot be inherited. An entry in Section II of the land register is mandatory so that the right is enforceable against anyone-including a new owner who might purchase the property.

Legally, the usufructuary is obligated to maintain the property in its current condition. They bear the ordinary maintenance costs (ongoing repairs, insurance, property tax), while extraordinary expenses and measures that alter the substance of the property are the responsibility of the owner.

Tax Advantages and Valuation

Usufruct offers significant tax advantages when gifting real estate. The value of the usufruct is deducted from the property value-thus, gift tax is levied only on the reduced value. The usufruct value is calculated according to the Valuation Act (BewG) using a capital value factor that depends on the usufructuary’s age at the time of transfer. The younger the usufructuary, the higher the deduction and the lower the tax burden.

Calculation example: A mother (60 years old) transfers a property with a market value of 600,000 euros to her daughter and retains the usufruct. The annual usufruct payment is assumed to be 18,000 euros (3% of the value). According to the Valuation Act, the capital value factor for a 60-year-old is approximately 11.0-the usufruct value is therefore €198,000. Only the remaining value of €402,000 is subject to gift tax. Since children enjoy an exemption of 400,000 euros, the tax burden would be limited to just 2,000 euros.

For rented properties, the following also applies: The usufructuary pays tax on the rental income as income from renting and leasing, but in return can claim depreciation (AfA) and income-related expenses. This tax treatment can be disadvantageous for parents with high incomes and advantageous for children with lower tax rates-a careful comparison is worthwhile.

Upon the expiration of the usufruct, all rights and obligations automatically transfer to the owner without the need for a new land registry amendment-the usufruct notation is deleted upon request. For tax purposes, the expiration of the usufruct does not constitute a gift, as it involves the agreed termination of a temporary or lifetime right.

Usufruct Upon Sale of the Property

An important practical question: Can a property encumbered with usufruct be sold? Yes-the owner can sell the property despite the registered usufruct. However, the new owner must respect the usufruct; the registered right in rem remains in effect (Section 1058 BGB). This significantly impairs the property’s marketability and the purchase price, as the buyer cannot use or rent out the property themselves as long as the usufructuary is alive.

For the sale of a property encumbered with a usufruct, we recommend redeeming the usufruct from the usufructuary-either through a one-time payment or through recurring payments. The early waiver of the usufruct must be notarized and deleted from the land register. From a tax perspective, caution is advised when waiving the usufruct in exchange for payment: The tax office may view this as a taxable consideration.

Practical Tip for Property Owners in Nuremberg and Franconia

In the Nuremberg metropolitan region, we observe that the combination of a gift and a reservation of usufruct is a popular strategy for asset transfer, particularly for multi-family homes and condominiums in sought-after locations such as Südstadt, St. Johannis, or Erlangen-Zentrum. For real estate values that often exceed the tax-exempt thresholds today, the usufruct deduction can significantly reduce gift tax or even eliminate it entirely.

We recommend planning the transfer well in advance and consulting an experienced notary and a tax advisor in the region. It is important to establish careful contractual provisions that clearly define the allocation of maintenance costs, coverage in the event of a need for long-term care, and potential rights of recovery (for example, in the event of the donee’s insolvency or the sale of the property within ten years).

It should also be noted that reserving a usufruct right can become complicated if the usufructuary is simultaneously receiving social assistance: In some cases, social welfare offices attempt to count the value of the usufruct as assets. Forward-thinking planning with expert support protects against undesirable consequences in this regard.

Frequently Asked Questions

What is the difference between usufruct and the right of residence?

The right of residence (Section 1093 of the German Civil Code) permits only the personal occupation of the property-neither renting it out nor transferring it to third parties is possible. Usufruct goes further: it additionally entitles the holder to rent out the property and retain the rental income. Usufruct is more valuable for gift tax deductions, as its capital value is higher than that of a pure right of residence. Additionally, a right of residence can be structured to be transferable under certain conditions, whereas usufruct is always strictly personal and non-transferable.

Can a usufruct be terminated early?

Yes, the usufructuary may waive their right-but only voluntarily. A unilateral revocation by the owner is not possible. Termination requires a notarized authorization of cancellation and the subsequent deletion from the land register. From a tax perspective, an early waiver can have significant consequences: If the usufructuary waives the right without compensation, the tax office treats this as a gift to the owner. The gift value corresponds to the remaining capital value of the usufruct. Consulting with a tax advisor is therefore essential before any early waiver.

Who pays for repairs on a property subject to usufruct?

The usufructuary bears the ordinary maintenance costs-that is, routine repairs, minor repairs, insurance premiums, and property tax. Extraordinary measures, such as roof renovation or the replacement of the heating system, are the responsibility of the owner. A clear contractual distinction in the transfer agreement prevents future disputes. In practice, it is advisable to include detailed provisions specifying the threshold amount at which a measure is considered “extraordinary” and how decisions regarding major renovation projects are to be coordinated between the owner and the usufructuary.

Is a usufruct automatically terminated upon the death of the beneficiary?

The right automatically expires upon the death of the usufructuary-no further action is required. The removal of the usufruct notation from the land register, however, must be actively requested. To do this, the owner generally needs a death certificate as proof for the land registry office. The cancellation is subject to a fee, but it is relatively inexpensive. After cancellation, the property is once again unencumbered and can be used or sold without restrictions.

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