Compensation payment to the community of heirs
November 6, 2010 | 25,00 EUR | answered by Michael Herrmann
I am a member of an inheritance community (3 people), consisting of my brother, sister, and myself.
My siblings live in the inherited 3-family house. My brother occupies apartment 1, my sister occupies apartment 2, and apartment 3 is used by both of them with no renting out to strangers.
What tax-free compensations are possible for me?
1/3 of the total living space corresponds to a value of approximately €500 according to the rental index.
We have agreed on this amount as compensation.
Do I have to pay taxes on this amount?
Dear inquirer,
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 is based on the description of the situation. Missing or erroneous information about the actual circumstances can affect the legal outcome.
There are two tax-related issues in this scenario.
The inherited house is attributed to the three heirs according to their share of inheritance (apparently 1/3 each). This inheritance is subject to inheritance tax law. If the house was transferred from the parents to the children, each heir has a tax-free allowance of €400,000. Inheritance tax is only due if this amount is exceeded per heir. Based on the rental value, I assume this is not the case.
The compensation payment to you may represent rental income if you are still listed as a co-owner in the land register. In this case, you would have to fully declare the monthly amount for tax purposes and could deduct any house expenses that you contribute to from the income.
The compensation payment represents a purchase price payment from the co-heirs for the share of the house you transferred, if you no longer own any part of the house. In this case, the monthly payment, similar to an interest-bearing loan, would partially represent repayment towards the value of the house and partially interest payment for the deferred purchase price.
Tax-wise, the relevant aspect in this case would be the included interest payments. These are calculated based on the house value, an assumed interest rate (e.g. 5% annually), and the resulting duration based on the monthly payment of €500.
Since the co-heirs, as tenants or buyers, cannot deduct rental costs or interest expenses for tax purposes, the goal of the arrangement should be to minimize the taxable income for you as much as possible. This is more likely to be the case in the variant of selling through monthly payments.
You should seek detailed advice on the tax consequences of renting out or selling, as there are several options for structuring a sale that cannot be fully explained in an online consultation.
I hope this information gives you a sufficient overview of the situation within the scope of your involvement and remain
Sincerely,
Michael Herrmann
Dipl.-Finanzwirt (FH)
Tax Advisor
