Ask a tax advisor on the topic of Real estate taxation

Differentiation between private and commercial real estate trading

March 3, 2011 | 30,00 EUR | answered by Dipl.BW/SB Ulrich Stiller

Inquiry to a tax advisor,
brief explanation of the background:
- This year I will be selling 4 properties
- All properties are financed through loans
- 3 properties were jointly acquired in 2000 (notarized on 12.12.2000) with a partner for commercial marketing (residential property). Never used for personal occupancy.
They now need to be sold because the costs of the loans are too high. Due to the high financing costs, no profit can be made.
Significant amounts of money have been invested in the properties since acquisition, including the purchase price, real estate agent commission, property transfer tax, notary fees, waste disposal fees, annual property tax, surveying costs for division, etc., which now exceed both the purchase price and the selling price. In addition, there are also the loan interests to consider.
- 1 property with a single-family home was acquired for personal use in 1994 jointly with my wife. This property was exclusively used by us. Renovation work was done over the years of ownership, with a significant, non-documented personal contribution (sweat equity). Some invoices for materials are available.
1. Will I be considered a commercial property dealer through the sale of the 4 properties, even if one property is used for personal purposes and now has to be sold due to divorce?
2. Is the self-used single-family home property not relevant in distinguishing between private and commercial property trading (3 property limit)?
3. If commercial property trading is determined, what costs can I offset against the sales proceeds to reduce profit? If all costs since acquisition can be deducted, estimated losses of around €150,000 will be incurred.
Will these losses be fully recognized and offset by the tax authorities immediately or spread out over several years?

Dipl.BW/SB Ulrich Stiller

Dear inquirer,

thank you for your inquiry, which I would like to answer based on your information and in the context of your activities in a preliminary consultation as follows:

First of all, it must be clarified whether there is actually a commercial real estate trade in your case. If you acquire and sell properties over the years, a commercial real estate trade may exist, leading to income from a business operation. This will be the case if you sell more than 3 properties within 5 years.

I assume that the single-family house you inhabit belongs to your personal assets. The sale of this house is tax-free, as you have used it yourself and the 10-year period required for the taxation of a private sales transaction has expired.

Regarding the other 3 properties, you and your partner together form a real estate community. If this real estate community has treated these properties as personal assets, a commercial real estate trade is unlikely to be assumed upon sale. Treatment as personal assets is considered if the real estate community has submitted the "Rental and Leasing" attachments for the 3 properties along with the determination declaration and the tax office has also assessed it as such. I assume this is the case in your situation. Due to the expiration of the 10-year period, there is also no private sales transaction here, so the sale would be tax-free.

I hope I was able to assist you.

Sincerely,

Ulrich Stiller
Tax Advisor / Business Administration Graduate