Usufruct subject to reservation

Usufruct with reservation of ownership - Usufruct with reservation of ownership is a right of usufruct that the donor reserves for themselves when transferring real estate to the next generation. It allows the donor to continue using the property (either by living in it themselves or by collecting rental income) even though ownership has already been transferred to the donee. Reserved usufruct is entered in the land register and is the most important instrument for anticipated succession in real estate.

Legal Structure

Reserved usufruct is entered as a limited personal servitude in Section II of the land register (Sections 1030 et seq. of the German Civil Code (BGB)). The usufructuary (donor) has the right to use the property and to collect the proceeds (rental income)-including the authority to rent the property to third parties. In return, they must bear the ordinary maintenance costs: ongoing upkeep, building insurance, and property tax. Extraordinary expenses, such as roof repairs, heating system replacement, or facade insulation, are borne by the new owner (donee).

Usufruct may be established as lifetime usufruct (which expires upon the death of the beneficiary) or as fixed-term usufruct. It is generally not inheritable and not transferable-the usufructuary cannot transfer the right to another person or bequeath it. Upon the death of the usufructuary, the right automatically expires and the land register is amended accordingly.

The priority ranking of the usufruct in the land register is decisive: A reserved usufruct registered after a mortgage is at risk of expiring in the event of a foreclosure sale. Therefore, the usufruct should ideally be registered in the first priority-before all mortgages. This is possible if the transferred property is debt-free or if existing mortgage creditors waive their priority.

Tax Implications

The reserved usufruct has significant tax consequences in several areas:

Gift Tax: When calculating gift tax, the capitalized value of the usufruct is deducted from the property value - the recipient is taxed only on the value reduced by the usufruct. The capitalized usufruct value is calculated by multiplying the annual value (net rental income or notional rental benefit) by an age-dependent multiplier pursuant to § 14 of the German Property Valuation Act (BewG). The older the donor, the lower the multiplier, the lower the usufruct value-and the higher the taxable gift value.

Income Tax: The usufructuary pays tax on the rental income as income from renting and leasing (Section 21 EStG) and may deduct depreciation, interest, and maintenance expenses for tax purposes. The donee, who owns the property, however, does not pay tax on any income as long as the usufruct exists.

Calculation of the Statutory Share: When calculating the statutory share in the event of inheritance, the 10-year period under § 2325(3) BGB generally does not begin to run in the case of a comprehensive reserved usufruct, according to BGH case law (BGH IV ZR 474/15), because the donor continues to use the property economically as an owner. The gift is fully taken into account in the calculation of the statutory share even after more than ten years-those entitled to a statutory share can therefore include the full value of the gifted property in the calculation.

Structuring Options and Protection for the Donor

In the case of a reserved usufruct, clauses for reclaiming the property should always be agreed upon to protect the donor in certain events: death of the donee before the donor (the property should not pass to the donee’s unwanted heirs), insolvency of the donee (protection against creditors’ claims), divorce of the donee (protection against claims for return by the divorced spouse), and premature resale by the donee without the donor’s consent.

These clawback clauses must be clearly formulated in the gift agreement and should be entered in the land register as a notice of reversion to secure them.

Practical Tip for Property Owners in Nuremberg

We recommend that property owners in the Nuremberg metropolitan area who wish to transfer real estate to their children or grandchildren during their lifetime carefully plan the use of usufruct with a reservation of ownership as a legal tool in consultation with a specialist attorney for inheritance law and a tax advisor.

In Nuremberg, the tax-free allowance for gifts to children is 400,000 euros - available for use every ten years (Section 16 of the Inheritance Tax Act). For a property with a market value of 600,000 euros and a capitalized usufruct value of 200,000 euros (donor 65 years old, annual value 20,000 euros, multiplier 10.0), the taxable gift value is only 400,000 euros - exactly the tax-free allowance, so no gift tax is due.

Important: The tax value of the property for gift tax purposes is determined by the competent tax office (in Nuremberg, the Nuremberg-South or Nuremberg-North tax office) using the income approach or cost approach in accordance with Sections 183 et seq. of the German Property Valuation Act (BewG)-this value may differ from the actual market value. An independent market value appraisal can help demonstrate a lower tax value (Section 198 of the German Property Valuation Act).

Frequently Asked Questions

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

Usufruct (Section 1030 of the German Civil Code (BGB)) grants the comprehensive right to use the property and collect the income (rent)-including through leasing to third parties. The right of residence (Section 1093 BGB) grants only the right to occupy the property oneself-leasing to others is not permitted. Usufruct has a higher capitalized value and reduces the gift tax value more significantly. For owners who wish to rent out the property and retain the rental income, usufruct is the appropriate instrument; for owner-occupiers who merely wish to secure their right of residence, a simple right of residence may suffice and have a lower capital value.

Does the 10-year period begin with a reserved usufruct?

According to current Federal Court of Justice (BGH) case law, the 10-year period under Section 2325(3) of the German Civil Code (BGB) generally does not begin in the case of a comprehensive reserved usufruct, because the donor continues to use the property economically as an owner. This means: The gift is fully taken into account in the calculation of the statutory share even after more than ten years-heirs entitled to a statutory share can include the full value. In the case of a mere right of residence, however, the period may begin to run if the donor has actually relinquished economic control. The distinction is legally complex-seek advice from a specialist attorney for inheritance law in your specific case.

Can I subsequently relinquish the usufruct?

Yes, the usufructuary can waive the usufruct at any time-by submitting a notarized authorization for cancellation and subsequent deletion from the land register. The waiver can have significant tax consequences: It may be considered a gift of the usufruct right to the owner and trigger gift tax. Conversely, the waiver also ends the usufructuary’s ongoing income tax liability on rental income. Always plan a waiver of usufruct together with your tax advisor and have the tax implications quantified before waiving the right.

Back to the Real Estate Glossary.