BFH: Capital gains attributable to home office remain tax-exempt

The capital gains generated from the sale of an owner-occupied property that are attributable to a home office are tax-exempt. That was the verdict of the Bundesfinanzhof (BFH), Germany’s Federal Fiscal Court (case ref.: IX R 27/19).

We at the commercial law firm MTR Rechtsanwälte can report that in instances where a property which was used for personal residential purposes is sold, the capital gains do not usually have to be taxed. This is also true for the portion of the capitals gains attributable to a home office that was offset against income tax in previous years. That was the verdict of the Bundesfinanzhof in a ruling from March 1, 2021. The Court found that the use of a home office falls within the definition of personal residential use and that said home office is thus exempt from taxation.

This decision saw the BFH go against a letter from Germany’s Federal Ministry of Finance from October 2000, according to which a home office is not used for residential purposes.

The case before the BFH concerned a teacher who had sold a condominium that belonged to her and in which she had personally lived in for around five years. She had used one of the rooms as a home office and had claimed income-related expenses in connection with this, and these were recognized by the competent tax office. Although she had sold her condominium after five years, i.e., within the ten-year holding period, her profits from the sale were tax-exempt because she had personally made residential use of the property. And yet the tax office sought to withhold income tax on the proportion of the profits attributable to the study, pointing out that the sale had taken place within the ten-year speculation period.

This was successfully challenged by the woman in question, with both the Finanzgericht Baden-Württemberg – the Fiscal Court of Baden-Württemberg – at first instance and later the BFH ruling that the capitals gains on the study were also tax-exempt.

The BFH noted that while the sale of the property within the ten-year holding period constituted a private sales transaction, the profit is not taxed if the property was used exclusively for personal residential purposes, or if the property was used for personal residential purposes in the year it was sold and in the previous two years. The Court held that the use of a home office falls within the definition of personal residential use, as it too would be used regularly to a limited extent for personal residential purposes.

Those who find themselves caught up in a tax dispute with the authorities can turn to lawyers with experience in the field of tax law.

Contributing Advisors

Links