Usufruct right on real estate
November 23, 2011 | 35,00 EUR | answered by Michael Herrmann
Our son wants to buy a warehouse that adjoins our property (purchase price: 35,000 EUR - financed by a loan). For this amount, we will register a mortgage on our property as security for the bank.
We then plan to rent this warehouse from our son for the next 5 years, with the rent being deductible as business expenses for us.
After 5 years, we will pay off the remaining debt of 25,000 EUR to the bank on behalf of our son. The warehouse will continue to be owned by our son, but in return, our son will grant us a usufruct right for the warehouse. We will then continue to use or rent out the warehouse ourselves.
What would be the tax implications of this transaction for us and our son (granting of usufruct in exchange for debt repayment)?
Best regards
Dear inquirer,
First of all, thank you for your inquiry, which I would like to answer based on your information and in the context of your initial consultation. The response is based on the facts provided. Missing or incorrect information regarding the actual circumstances can influence the legal outcome.
The assessment of the lease agreement for the first five years is straightforward. Your son generates income from rental and leasing activities, which you deduct as business expenses. Please note that the rental expenses for business tax purposes are re-added at 50%. Furthermore, in contracts with close relatives, it is important to ensure that the agreements withstand an arm's length comparison and are actually implemented.
The appointment of the usufruct in exchange for assuming the remaining debt constitutes a gift usufruct. This is valued based on the capital value. The capital value is determined according to § 13 et seq. of the Bewertungsgesetz as follows:
Annual value x multiplier = capital value
The annual value represents the net income (rental income minus costs). The multiplier depends on the duration of the usufruct agreement (Table 7 or 8 of the BMF letter dated 7.12.2001).
If assuming the remaining debt amounts to less than 10% of the capital value, an overall gratuitous gift usufruct is present. Otherwise, a partial or full-value gift usufruct is present. The gratuitous gift usufruct is tax-disadvantageous since in this case, neither the owner nor the usufructuary can claim depreciation. The usufructuary can only deduct the other costs if they have actually borne them.
In the case of a full-value gift usufruct, the owner continues to generate income from rental and leasing activities. The usufruct fee remains a business expense. The lump sum payment is to be spread over the term of the agreement. In the case of a partial-value gift usufruct, the tax treatment is based on the ratio of the usufruct fee to the capital value of the usufruct.
Given the complexity of the topic, it is advisable to seek detailed advice on-site. Additional information is required for this purpose, which cannot be processed within the scope of this initial consultation.
Nevertheless, I hope that these details have provided you with a sufficient overview of the situation in the context of your inquiry and this initial consultation, and I remain
Yours sincerely,
Michael Herrmann Tax consultant Diplom-Finanzwirt (FH)
