Boundary of the property in real estate sales
November 15, 2011 | 30,00 EUR | answered by Michael Herrmann
Dear Sir or Madam,
I have participated in four closed-end real estate funds (LBB / IBV) from 1997 to 2001. Due to ongoing problems, the fund company offered to buy back the fund shares within a certain period of time. I have already sold 3 of these funds.
No. 1: Acquisition on 08.12.1997 - Sale on 30.06.2008
No. 2: Acquisition on 28.12.1998 - Sale on 31.03.2009
No. 3: Acquisition on 20.12.2000 - Sale on 30.06.2011
I bought No. 4 on 27.12.2001 and the option to sell can only be exercised until 30.06.2012. In addition, my wife (joint assessment) must transfer shares in an inherited property in 2011 or 2012 (disposal) and the heirs' community wants to sell a condominium in which my wife also has a share due to inheritance.
The 10-year speculation period is not relevant for tax purposes, as the purchase date of all properties is more than 10 years before the sale. The sale of the real estate funds was not planned but was only realized due to the offer of the purchase option by the fund company.
Tax-relevant could be that we sell more than 3 properties within 5 years, which tax authorities could potentially interpret as a commercial activity, possibly with significant tax disadvantages for us.
I have read that the criterion of an "object limit", according to which the acquisition (construction) and sale of a certain number of objects (more than 3) establishes a commercial activity, alone has no significance and further indicators or criteria must speak for the presence of a commercial real estate trade. I have also read that inherited properties are not taken into account in this consideration (object limit).
Before making my sales decision (4th fund in 2012), I definitely want to clarify whether I run the risk of the tax office recognizing a commercial real estate trade through this sale and whether the information regarding the inherited properties is correct.
Thank you for your efforts.
Dear questioner,
First of all, thank you very much for your inquiry, which I would like to answer based on the information provided and in the context of your involvement in an initial consultation. The response will be based on the facts presented. Missing or incorrect information about the actual circumstances can affect the legal outcome.
A commercial real estate trade, resulting in liability for trade tax, exists when a taxpayer sells more than three properties within a short period, typically five years between acquisition and sale. Initially, it is crucial to determine which properties are to be included in the three-property limit.
The inherited property can be excluded from consideration if the deceased was not already engaged in commercial real estate trading. (Federal Fiscal Court, ruling of March 15, 2000, Federal Tax Gazette 2001 II p. 530)
The sale of shares in closed real estate funds is only relevant if the fund itself is not already engaged in commercial activities. In this case, commercial income would already exist at the fund level. Only if the fund does not generate income, a reclassification to commercial income at the shareholder level may be considered. However, to qualify for the sale of shares, the shareholder must hold at least 10% of the respective company or a share of less than 10% must have a fair market value of more than €250,000 (Federal Ministry of Finance, ruling of March 26, 2004, Federal Tax Gazette 2004 I p. 434 - paragraph 18).
If losses have been incurred through the sale, a commercial real estate trade can be advantageous due to the offsetting with other income.
Whether a commercial real estate trade definitively does not exist cannot be determined through this public internet portal. I strongly recommend that you seek personal advice on this matter locally. Your situation is very complex, not least because of your investments. It should therefore be fully investigated and evaluated, as details or specific aspects of the arrangement may be crucial. The costs of this consultation will certainly exceed €30, but given the significant tax implications, it is appropriate and hopefully understandable.
Nevertheless, I hope that these details have provided you with a sufficient overview of the situation within the scope of your involvement and this initial consultation.
Best regards,
Michael Herrmann
Tax Advisor
Graduate Financial Economist (University of Applied Sciences)
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