Ask a tax advisor on the topic of Real estate taxation

Reclassification of a property from business assets to personal assets

February 7, 2011 | 30,00 EUR | answered by Dipl.BW/SB Ulrich Stiller

Fall exploration:
A freelance journalist and photographer, who has been self-employed in this profession for 20 years, purchased an apartment with an underground parking space for a vehicle approximately 11 years ago, on February 22, 1999.
The purchase price was 601,500.00 German Marks, with 579,000.00 Marks allocated to the apartment and 22,500.00 Marks to the underground parking space.
Since the apartment has two floors, the upper part is used as a workspace, as well as the underground parking space.
46.45% of the property, including in the tax year 2008, were claimed for tax purposes as follows:
Approximately 5,000.00 Euros per year for 25 years in degressive depreciation for both the workspace and the underground parking space.
5,000.00 Euros in annual interest for the workspace and underground parking space.
Operating costs for the workspace and underground parking space.
Since 2006, this journalist has been receiving a reduced earning capacity pension for health reasons. His situation has led to a significant decrease in his taxable income. The depreciations from the workspace have therefore not provided any tax benefits since 2006. However, he still wants to maintain his freelance work as a journalist, author, and photographer, albeit in a significantly reduced capacity.

Questions:
How should the current legal situation be assessed?
Is it advisable to remove the real estate portion from the business assets and transfer it to personal assets to avoid high costs to the tax office later on (e.g. upon sale) when the self-employment is dissolved?
If so, what value should be booked for the business portion? (Book value, initial depreciation value, or the difference between the two?)
Are the loss carryforwards from 2005-2008 and 2009 still usable for this removal?
Can the real estate portion be gradually reduced on a yearly basis to save on taxes?
In 2009, a total of -134,323.40 Euros was paid as a one-time repayment from personal assets. Should this payment be proportionally recorded in the profit and loss statement of the business accounting as a personal investment, and if so, where in the tax form? (Note: the loan has not been fully repaid.)

Dipl.BW/SB Ulrich Stiller

Dear inquirer,

Thank you for your inquiry, which I would like to answer based on the information you provided and in the context of your involvement in an initial consultation as follows:

The transfer of the building portion used for business purposes, including the land portion, into private assets leads to a taxable withdrawal gain. The withdrawal should be made at fair value or current value. The withdrawal gain is determined by the difference between fair value (current value) and book values.

The background of this regulation is that you have claimed depreciation and other expenses for the portion used for business purposes as deductible business expenses over the years. In contrast, the sale or withdrawal of business assets constitutes a tax-increasing event, with recognized tax loss carryforwards, to the extent that they have not arisen from private sales transactions or negative capital gains, can be offset against them.

However, if the business activity is discontinued, then the withdrawal gain would be included in a tax-free or reduced discontinuation gain. A tax-free amount of 45,000 euros is granted if the taxpayer has reached the age of 55 at the time of business discontinuation or is permanently occupationally disabled in the sense of social security (§ 16 para. 4 EStG). The tax-free amount is reduced by the amount by which the discontinuation gain exceeds 136,000 euros, and it is completely eliminated if the discontinuation gain exceeds 181,000 euros. Any remaining discontinuation gain is then subject to reduced taxation according to § 34 EStG. The repayment of 134,000 euros is not a business expense, but rather a restructuring of assets.

In your case, you should seek detailed tax advice, as the matter is very complicated. This consultation cannot replace the advice provided by this forum.

Best regards,

Ulrich Stiller
Tax Advisor/Qualified Business Economist