FG Münster: Loss of estate tax exemption in connection with sale of family home

A family home is no longer exempt from estate tax if the heir sells the house within ten years, even if the decision to move out was informed by the advice of a doctor.

We at the commercial law firm MTR Rechtsanwälte note that a family home can be inherited tax-free if certain conditions are met, it being necessary, among other things, for the heir to promptly begin personally making residential use of the property and to continue doing so for the next ten years. If the inherited family home is sold during this ten-year period, then it is no longer exempt from estate tax. According to a ruling of the Finanzgericht (FG) Münster – the Fiscal Court of Münster – from December 10, 2020, this is the case even if the heir has moved out on the advice of a doctor and sold the family home (case ref.: 3 K 420/20 Erb).

The plaintiff in the case in question inherited her deceased husband’s estate in 2017, including the 50 percent co-ownership share in the detached family house which the married couple had been living in at the time of the husband’s death. However, the plaintiff’s living situation changed when, in 2019, she sold the house and moved into a condominium instead. The competent tax office subsequently amended the estate tax assessment notice, with the result that the family home was deemed to have retroactively lost its tax-exempt status following the sale of the house within the ten-year time frame.

The plaintiff objected to this, noting that her husband had passed away in the family home and that she had been suffering from depression and anxiety in the wake of his death, which is why she made the decision to change her living environment on the advice of her doctor. According to the plaintiff, there were compelling reasons preventing her from making personal use of the family home.

The lawsuit was nonetheless rejected by the FG Münster. It held that the tax-exempt status of a family home which the heir stops personally making residential use of within ten years is only not lost if there is a compelling reason preventing the heir from making personal use of the property. This was found not to be the case here.

The FG Münster went on to note that while the plaintiff had indeed been under considerable psychological strain as result of her husband’s death and her depression, a compelling reason could only be said to exist if it was not possible for the heir to keep house, e.g., due to the need for care. The Court has granted leave to appeal to the Bundesgerichtshof (BGH), Germany’s Federal Supreme Court.

Heirs who inherit a family home need to make sure that the conditions for tax exemption are met. Lawyers with experience in the field of tax law can offer advice.

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