Real estate heirs: How the super-rich are spared the tax authorities

Status: 09/02/2023 08:52 a.m

The heirs of large housing stocks in Germany enjoy tax privileges, while many smaller landlords can hardly afford the inheritance tax and are forced to sell. Tenants suffer as a result.

By Christiane Cichy, mdr

Especially in big cities, smaller landlords can often no longer afford the inheritance tax and are forced to sell. Wolfgang Donhärl from Munich is such a case. Although he was able to avert the sale of his inheritance with a loan, he had to drastically increase the rents to do so.

In 2017 he and his sister inherited an apartment building with 13 apartments and three shops. Both live in the house with their families. But since the tax office calculated the property value at the time of the inheritance at more than eight million euros, an inheritance tax of one million euros was due. “Of course, we didn’t have the money that the tax office called up within six weeks in our account,” says Donhärl. “That’s why we had to take out a loan, which we’re now paying back over 30 years.”

When the loan for the inheritance tax is paid off, Donhärl will be in his mid-80s. The alternative would have been to sell the house to an investor who is already queuing up for the chemist. But that was out of the question for him and his family: “The house was built by my great-grandfather in 1901, it was always family-owned. It survived an economic crisis and two world wars. You don’t back down because of the tax office,” says Donharl.

The tenants bear the burden

Because of the loan, however, Donhärl had to increase the rents. Twice in the past five years, he says. By 15 percent each time – the highest that was legally permissible. A bitter pill for his tenants. Because some have lived here for many years at prices well below the rent index in Munich.

The conclusion of the landlord is clear: “Ultimately, the burden is borne by the tenants, because I have no other income opportunities for these sums. Sooner or later, of course, that goes through the rents, quite clearly.”

The problem with inheritance tax is that it is currently not based on the rents paid by the heirs, but on the value of the property. However, especially in big cities like Berlin or Munich, land prices have risen exorbitantly – and with it the inheritance tax. As a result, the heirs to residential buildings are increasingly unable to pay inheritance tax. Many then only have the option of selling the house to an investor, which then drives up rents again.

unjust tax distribution

Donhärl thinks it’s basically right that he pays taxes as the heir to an apartment building. But he finds it unfair how the tax burden is distributed. Because if he had not just inherited an apartment building, but instead inherited hundreds of apartments, he would not have to pay one million euros in inheritance tax, but zero euros. Because anyone who inherits more than 300 apartments is automatically considered a housing company by the tax authorities. It doesn’t matter whether he really is one or not. In this way, the assets are spared from taxes.

For Markus Sebastian Rainer, specialist lawyer for inheritance law, incomprehensible. “The more you inherit, the less you are taxed. In the income tax scale, the opposite principle applies. Strong shoulders have to carry more than weak ones. And in inheritance tax law, weak shoulders have to carry more than strong ones. That’s absurd.”

Federal Fiscal Court: Regulation not allowed

For heirs like Wolfgang Donhärl, it is incomprehensible why an heir of 301 apartments automatically counts as a housing company and therefore pays no taxes, but this does not apply to him with his 13 apartments.

“It’s an arbitrary decision. Of course I can also say: We are a company. We also have to order the craftsmen here, things are being renovated, things are being built. I can also say: I’m a company, it doesn’t help me . In this respect it is a great injustice.”

The Federal Fiscal Court, which has classified the regulation with the 300 apartments as inadmissible, sees it similarly to Donhärl. As early as 2017, the judges ruled that the number of apartments was irrelevant. A housing company can only be accepted if it offers certain special services, such as providing bed linen and changing it monthly or setting up lounges. In other words, specifications from which only facilities such as dormitories would have benefited.

Tax authorities should not apply the decision

But instead of abolishing the regulation, the highest financial authorities issued a so-called non-application decree. In concrete terms, this means that the tax offices should ignore the decision of the Federal Fiscal Court. It says: “The judgment is not to be applied beyond the individual case. The previous approach should continue to be adhered to.”

This procedure was coordinated with the responsible Federal Ministry of Finance, which was headed by today’s Federal Chancellor Olaf Scholz (SPD). A month earlier, the ministry had warned of negative effects on the housing market in a circular regarding the BFH decision.

Even today, the ministry justifies the tax exemption for more than 300 apartments with the risk that heirs of more than 300 apartments would be burdened with inheritance tax, they would then have to sell the apartments, which could lead to rent increases.

The fact that even smaller landlords like Donhärl would have had to sell their family home without the loan does not seem to interest politicians. And if he had inherited it today instead of in 2017, the inheritance tax would have been over two million euros. Then the only option left for him and his family was to sell it to an investor.

Many exemptions for the super rich

The regulation with the 300 apartments is just one example of many, because there are numerous exception rules for the super-rich with which they can exempt themselves from inheritance tax, according to lawyer Rainer: “An illegitimate partner who inherits 100,000 euros from his unmarried partner he has an allowance of EUR 20,000. He has to pay tax on EUR 80,000 at 30 percent. He therefore pays EUR 24,000 in inheritance tax. That is a huge amount,” says Rainer. “And vice versa: Someone who inherits a company, for example for 50 million euros, currently pays no tax at all if they are cleverly structured. That is not fair. The inheritance tax law suffers from the fact that we are basically taxing the wrong people.”

The Federal Constitutional Court has already seen it this way three times and has therefore classified parts of the inheritance law as unconstitutional – most recently in 2014. Despite a reform, there are still opportunities for tax exemption.

Civic association Finanzwende sharply criticizes

The Bürgerverein Finanzwende is therefore not only calling for the abolition of the 300 rule, but also for a comprehensive reform of inheritance tax, because the state would lose billions because of the exceptions, according to Managing Director Daniel Mittler.

“The largest tax subsidy in our country goes to the richest people in our country. You just have to let that melt in your mouth. Every year we lose at least five to ten billion euros. Simply because of the exemptions from inheritance tax.”

Privileged heirs like Yannick Haan now find that the different tax rates are unfair. The young man inherited it himself and bought real estate for it. He hardly paid any taxes. That’s why he wrote a book about inheritance, including the numerous privileges. His conclusion is clear: “It’s actually the wrong people who pay. Those who really inherit a lot, the big heirs, pay hardly any taxes or no taxes at all. Of course that’s unfair, and they finally have to be prosecuted.”

However, it currently seems unlikely that the tax privileges will change. The responsible Federal Ministry of Finance writes that they do not want to endanger Germany’s competitiveness.

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