Unlike in the case of eminent domain, the foreclosure of a property may constitute a private sales transaction. That was the verdict of the Finanzgericht (FG) Düsseldorf, the Fiscal Court of Düsseldorf (Az.: 2 V 2664/20 A (E)).
It can be a very bitter experience for the property owner. We at the commercial law firm MTR Rechtsanwälte can report that – unlike in the case of eminent domain – when a property goes under the hammer and becomes the subject of a foreclosure sale, the profit is subject to taxation. That was the verdict of the Finanzgericht Düsseldorf in proceedings for interim relief. In a ruling from November 26, 2020, the court held that the transfer of ownership by way of a foreclosure sale may constitute a private sales transaction within the meaning of section 23 of the German Income Tax Act (Einkommensteuergesetz, EStG).
The case in question concerned two properties owned by the claimant that became the subject of a foreclosure sale in 2019. Both properties had likewise been acquired by the claimant in the context of a foreclosure sale.
The competent tax office viewed the foreclosure of both properties as representing two private sales transactions and taxed them as miscellaneous income. The claimant brought a legal action against this, arguing that, as in the case of eminent domain, a foreclosure sale is not predicated on a freely made decision of the owner. Accordingly, a foreclosure sale does not constitute a private sales transaction within the meaning of the EStG. The claimant also reasoned that the calculation of the ten-year time period should not be based on the point at which the highest bid was made but rather on the date the bid was accepted, which the claimant emphasized is an event that occurs later, after the ten-year period has expired.
The FG Düsseldorf did not follow this line of reasoning, ruling instead that a foreclosure sale is in fact predicated on a freely made decision of the owner. The court noted that, unlike in the case of eminent domain, the owner is able to prevent the foreclosure by satisfying the creditors’ claims. Whether this is actually economically possible was said to be immaterial.
The FG Düsseldorf went on to state that the sale of the properties had occurred within a period of ten years post-acquisition. It found that for the purposes of calculating the time period pursuant to section 23 EStG, the material event is the compulsory legal transaction, and that, in the case of a foreclosure sale, this occurs when the highest bid is made. The court clarified that the subsequent acceptance of the bid is merely the act that effects the legal transfer of ownership.
Lawyers with experience in the field of tax law can provide counsel in the event of legal disputes with the tax authorities.
For more information: