Gift tax

Gift Tax - Gift tax is a tax on gratuitous transfers of property between living persons and is levied under the Inheritance and Gift Tax Act (ErbStG). It systematically supplements the inheritance tax to ensure that transfers of assets cannot be made tax-free solely through premature gifts.

Exemptions, Tax Brackets, and Calculation

Gift tax is based on the same tax brackets and exemptions as inheritance tax (Sections 15 and 16 of the ErbStG). The decisive factor is the family relationship between the donor and the recipient:

• Spouses and registered partners: 500,000 euro exemption
• Children: 400,000 euro per parent
• Grandchildren: 200,000 euro
• Siblings, nieces, nephews: 20,000 euros
• Non-relatives: 20,000 euros

The key advantage over inheritance tax: Under § 14 ErbStG, the exemption amounts are renewed every ten years. Those who plan early can transfer significant assets tax-free through staggered gifts over several decades. For a property valued at 800,000 euros, parents can, for example, first transfer a 50 percent co-ownership share to one child and, after the ten-year period has expired, the second half-each within the exemption limit of 400,000 euros per parent.

The valuation of real estate for gift tax purposes is conducted in accordance with the Valuation Act (BewG). Since the 2023 reform, the adjusted asset value and income value methods have frequently resulted in higher tax values that are closer to the market value. Depending on the type of property, the comparable sales method (condominiums), the income approach (rental properties), or the cost approach (single-family and two-family homes) are used. An appraisal by a publicly appointed expert may be advisable if the proven market value is below the property value determined by the tax office.

An important planning tool is the usufruct reservation: If the donor transfers a property but reserves the right to use it or receive rental income for the rest of their life, the capitalized value of the usufruct significantly reduces the tax base for gift tax. The older the donor is at the time of the transfer, the lower the usufruct value to be deducted-and the higher the taxable acquisition.

Reporting Requirements and Procedures

Under Section 30 of the Inheritance Tax Act (ErbStG), gifts must be reported to the competent tax office within three months-by both the donor and the donee. In the case of notarized gifts (which is the norm for real estate), the notary handles the reporting to the tax office. The tax office then checks whether the tax-free allowance has been exceeded and whether, taking into account previous gifts within the ten-year period, a tax liability arises.

The gift tax is assessed by a tax assessment notice. In the case of real estate gifts, the recipient may, under certain conditions, apply for a deferral of the tax (Section 28 ErbStG) if immediate payment would result in undue hardship-for example, because the property cannot be sold in the short term and no liquid funds are available.

Practical Tip for Nuremberg and the Metropolitan Region

In the Nuremberg metropolitan region, real estate values have risen significantly in recent years-in neighborhoods such as Erlenstegen, St. Johannis, or Rechenberg, single-family homes often exceed the €400,000 exemption limit for a single parent. We recommend that owners planning to transfer real estate to children or grandchildren include gift tax in their planning at an early stage.

A proven strategy in the region is the chain gifting arrangement involving both parents: If the property belongs to only one spouse, that spouse first gifts a co-ownership share to the other spouse (tax-free up to 500,000 euros), and then both parents transfer their respective halves to the child-this allows for the use of two tax-free allowances of 400,000 euros each. We advise always consulting a tax advisor or a specialist tax lawyer regarding such arrangements.

Frequently Asked Questions

How often can I use the gift tax exemption?

The personal exemption is available again every ten years. If multiple gifts are made by the same donor to the same recipient within a ten-year period, the values are added together (Section 14 of the German Inheritance Tax Act). Only after the ten-year period has expired does the count start over. Through timely planning, even high-value real estate can be transferred tax-free over two or three gifting intervals in this manner.

Do I have to report a gift to the tax office, even if the exemption limit is not exceeded?

Yes. The reporting obligation under § 30 ErbStG applies regardless of whether tax is actually due. The donor and the donee must report the gift to the competent inheritance tax office within three months. For real estate gifts in Bavaria, the Munich II Tax Office (Inheritance Tax Division) is responsible. In the case of notarized contracts, the notary handles the reporting.

Can a usufruct completely avoid gift tax?

No, a usufruct does not eliminate the tax liability, but it significantly reduces the tax base. The capital value of the usufruct is deducted from the property value. For a 60-year-old donor and an annual rent of 18,000 euros, the usufruct value can amount to several hundred thousand euros and, in many cases, bring the gift below the tax-free allowance. The younger the donor, the higher the deduction-and the lower the remaining tax burden.

2023 Valuation Reform and Its Impact

The reform of the Valuation Act (BewG) effective January 1, 2023, has significantly increased the tax-assessed real estate values in many cases. The revised asset value and income value methods are now more closely aligned with actual market prices. In the Nuremberg metropolitan region, where purchase prices have risen sharply in recent years, the property value determined by the tax office may now be close to or even exceed the actual market value.

If the property value exceeds the verifiable market value, the donor and the donee have the option of proving the lower market value through an appraisal by a publicly appointed expert (Section 198 of the Valuation Act). In this case, the tax office is obligated to apply the proven lower value. Given the appraisal costs of 2,000 to 5,000 euros, this strategy is worthwhile only if the resulting tax savings exceed these costs-typically for property values above 500,000 euros. We recommend that owners in the Nuremberg metropolitan region clarify the tax valuation parameters with a tax advisor early on when planning upcoming gifts and include an expert appraisal in their planning.

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