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Deductibility of expenses in the context of an agreement to avoid insolvency.

January 26, 2010 | 40,00 EUR | answered by Oliver Burchardt

Scenario:
A property is bequeathed to two individuals, each holding 50 percent ownership.
After the death of the testator (here referred to as the legator), the heir who was mistakenly registered as the owner in the land register due to the usufruct granted to them.
A loan burdening the property is being serviced by the usufructuary until their death, with the execution being the responsibility of an executor.

During the lifetime of the usufructuary, upon the request of the executor, they are removed as the owner in the land register and the legatees are registered as the owners.

When the usufructuary dies in 2007, the owners assume full rights and obligations over the property and continue servicing the loan.
In 2008, the wife of the deceased usufructuary (separate property) files for insolvency over her husband's estate.

The insolvency administrator includes the property in the estate and demands that the owners hand over the property. The bank also files a request for repayment of the loan to the insolvency administrator, stating that the owners have not automatically become borrowers. There is no law that provides for the automatic transfer of the loan to the new property owners. The bank is requested to inform who the borrower is now after the death of the usufructuary.

In an out-of-court settlement, the parties agree to make certain payments to the wife of the deceased usufructuary in order to avoid insolvency and return of the property.
These payments include settling the bank by paying off the remaining loan, a prepayment penalty, an administrative fee, and a notary fee for the deletion consent.

Question:
Since the property owners are clearly not borrowers according to the bank's statement, in my opinion, they made a payment to retain their ownership, which would otherwise have become part of the estate with the insolvency administrator.

In this case, can the amount settled with the bank in the out-of-court agreement be tax deductible from rental income?
If yes, can the amounts paid by the owners to the bank in monthly installments after the death of the usufructuary also be tax deductible? These payments were made to avoid a possible foreclosure by the bank, which threatened to do so if the payments were not made, even though the owners were not borrowers.

I apologize for the detail, but it seems necessary in this case.

Best regards.

Oliver Burchardt

Dear inquirer,

Thank you for your inquiry, which I am happy to answer as part of an initial consultation.

Please note that the tax assessment is based on the information provided in the scenario. Adding, changing, or omitting information can affect the tax assessment.

The case you described is very complex and difficult to assess conclusively within the scope of such a forum, as it also depends on the wording in the contracts.

Based on your description, I do not believe that the amounts are fully tax-deductible.

Rather, they are considered subsequent acquisition costs for the property that were paid to prevent interference with the ownership status. According to my research, there is no case law from the Federal Fiscal Court (BFH) for your specific case, but in a similar case involving an appeal under § 3 para. 2 of the Appeal Act, the BFH decided that these are subsequent acquisition costs (BFH ruling of 17.4.2007, ref IX R 56/06). The payment is equivalent to a subsequent assumption of a third-party liability, which always leads to subsequent acquisition costs.

In the same ruling, the BFH stated that all payments made in the context of the redemption are to be classified as subsequent acquisition costs. Therefore, tax relief is only possible through depreciation.

I regret that I cannot provide you with a more positive response.

Kind regards,

Oliver Burchardt
Certified Public Accountant
Tax Consultant