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3-object rule in succession of inheritance

March 7, 2022 | 35,00 EUR | answered by Steuerberater Knut Christiansen

Dear Sir or Madam,

Presentation of the situation:

In 2014, we (two brothers) inherited three undeveloped plots of land (A, B, C) from our father through succession. The plots had been in his ownership for over 30 years. Plots A and B are fully developed, ready-to-build plots of land. Plot C (the largest plot) is located behind the other two and was designated as "meadowland / fallow land". Through a development plan commissioned by us (the heirs), plot C was planned and legally developed, with access through plot B. There has been no construction activity such as road development or other construction work. Only the activities of the planning office were commissioned by us and led to a legally binding development plan. The plots have not been divided or surveyed yet. According to the development plan, we could now divide and survey the total area (A+B+C) into up to 10 building plots for single or double houses.

Question 1: If we now sell 8 out of the 10 parcels, will the "3-object rule" apply to us? After all, it is a legal inheritance without anticipation and my father was the owner for several decades before his death. Or does the activity surrounding the development plan automatically classify us as "commercial real estate dealers"?

Question 2: If we now divide the inheritance and dissolve the heirs' community, and then each brother parcels and sells their share (5 plots per brother), will we also fall under the "3-object rule" and have to pay taxes on all sales? Is it not technically true that the heirs' community commissioned the development plan and not the individual brother?

Question 3: If questions 1 and 2 lead to the conclusion that the "3-object rule" applies and sales tax is due if each person sells more than 3 plots within 5 years, what else can be done to avoid this within the framework of the law? One possibility would be to combine 3 parcels and sell them to an investor who can then divide them themselves afterwards. Are there any other options available?

Steuerberater Knut Christiansen

Good day,

taking into account the fee granted by you, I hereby provide the following non-binding initial information.

According to Tz. 26 of the BMF letter regarding commercial real estate trading, the following applies:

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Unimproved land
When selling unimproved land, the principles outlined for the acquisition and sale of developed land apply accordingly (cf. BFH judgment of December 13, 1995, BStBl 1996 II p. 232). This means that the acquisition, subdivision, and sale of more than three unimproved parcels of land (building plots) is only considered commercial if:

- the parcels of land (building plots) were acquired with the intention of sale, or

- the taxpayer has engaged in activities beyond subdivision (e.g. development, zoning plan, preparation for construction).

In mixed cases, Tz. 25 applies accordingly.
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This would mean in your case: if the tax office cannot prove an acquisition with the intention of sale (by your father), there is no commercial real estate trading, even if more than 3 parcels are sold.

However, I would recommend requesting a binding ruling from the tax office to avoid any disputes.

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Questions 2 and 3 would then be irrelevant in my opinion. Nevertheless, for completeness: a structure as requested in question 2 would be considered as a whole plan. This would generally not avoid commercial real estate trading.

Regarding question 3: in my view, there are no further possibilities. Limiting it to a maximum of 3 properties would be the only measure to prevent commercial real estate trading.

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I would like to point out that this forum cannot replace a comprehensive and personal tax consultation, but is primarily intended to provide an initial tax assessment. Adding or omitting relevant information could lead to a different legal assessment of your issue.

Best regards!

Knut Christiansen
Tax advisor