Federal Fiscal Court clarifies tax liability in the sale of garden plots
The tax qualification of private real estate sales is regularly at the center of current legal developments. Recently, the Federal Fiscal Court (BFH), in a landmark decision (Ref.: IX R 14/21), further defined the tax treatment of the sale of so-called “garden plots.” The starting point was the question of whether the sale of a property section previously used solely as a garden falls under the tax exemption provided in Section 23 (1) sentence 1 no. 1 sentence 3 of the German Income Tax Act (EStG).
Background: Private sales transactions under Section 23 EStG
Under German tax law, the sale of real estate by private individuals is generally subject to taxation if the period between acquisition and sale is less than ten years (Section 23 (1) sentence 1 no. 1 EStG). However, an exception applies if the property was used exclusively for the owner’s own residential purposes between acquisition and sale, or was used for such purposes in the year of sale and in the two preceding years (Section 23 (1) sentence 1 no. 1 sentence 3 EStG).
This provision is intended to prevent private assets from being sold at a profit within a short period and the gains being realized tax-free. At the same time, the legislator aims to promote the acquisition of residential property with the tax exemption for owner-occupied real estate.
BFH decision: No tax exemption for pure garden plots
Facts of the case
In the case before the BFH, the taxpayer had sold a part of a private property that was used as a garden and had not previously formed part of any residential building. Although the sold section adjoined the residential property, it was separated from the overall property by subdivision and sold as an independent land parcel.
Legal assessment by the Federal Fiscal Court
The Federal Fiscal Court clarified that the tax exemption under Section 23 (1) sentence 1 no. 1 sentence 3 EStG applies exclusively to real estate that is used for owner-occupied residential purposes. Pure garden plots or parts of properties that do not form part of the actual residential house or cannot be directly associated with it are not eligible for a tax exemption.
It is crucial that only the area directly serving residential purposes is considered an owner-occupied property. Areas used exclusively as garden land and not part of the actual residential area—even if they adjoin the house plot—do not meet these requirements.
As a result, any gain from the sale of such a garden plot within the ten-year period under Section 23 EStG is subject to taxation.
Consequences for owners and investors
Differentiation according to property use
With this ruling, the BFH provides clarity regarding the distinction between owner-occupied parts of properties and other areas. The key factor remains usage: If the portion of the property sold is not directly used for residential purposes, the tax exemption does not apply.
Significance for practice
For affluent private individuals, companies, and investors wishing to structure or adapt their property holdings flexibly, this ruling provides important guidance. In particular, for partial sales of green or garden land, a careful review is recommended to determine whether actual residential use exists for each respective section in the tax sense.
Structural considerations in property subdivision
Property owners wishing to sell plots face the challenge of assessing each parcel in terms of its usage history and its tax treatment. The BFH ruling makes it clear that mere geographical proximity to a residential house is not sufficient to justify a tax exemption. Therefore, well-founded legal and tax considerations must be made when structuring real estate transactions.
Tax classification in the international context
Tax consequences of private real estate sales must also be considered in an international context. Although the German Income Tax Act sets out detailed requirements for private sales transactions, bilateral treaties or divergent regulations abroad may influence the tax treatment of such transactions.
Ongoing and future proceedings
The Federal Fiscal Court’s decision is legally binding. However, in comparable cases, individual circumstances may differ, especially if there is a dispute over the type, extent, and intensity of the actual use of the property. It should be noted that each tax determination must be carefully assessed, taking into account all relevant facts and legal frameworks. In future proceedings, case law will further specify and differentiate the scope of the tax exemption.
Source reference
The reasons for the decision are published, for example in the BFH ruling of 26.09.2023 – IX R 14/21, and can be viewed at (see also: https://www.juraforum.de/news/bundesfinanzhof-keine-steuerbefreiung-beim-verkauf-von-gartengrundstuecken_259561).
Conclusion
Current case law confirms: The decisive factor for tax exemption in the sale of properties is their actual use for owner-occupied residential purposes. Owners and purchasers should be aware that the tax consequences arising from the sale of garden or accessory land are determined by the statutory requirements set forth in Section 23 EStG.
In the event of legal uncertainties in connection with property sales, taxation of private sales, or the interpretation of tax regulations, it is advisable to seek qualified legal assistance. The lawyers at MTR Legal are ready to provide comprehensive information on current developments and their impact on individual situations.
