Transferring property to your childrenplanning a lifetime gift properly

The allowances

Each child can therefore receive €800,000 tax-free from both parents together – and again every ten years. Those who start early can transfer even larger assets tax-free.

How is the property valued?

For gift tax (Schenkungsteuer), the tax office values property according to the Valuation Act (Bewertungsgesetz) – using the comparative, income or asset value method. If the actual market value is lower, an expert's report can help to reduce the taxable value.

Right of residence and usufruct as a structuring tool

If the parents reserve a lifelong right of residence (Wohnrecht) or a usufruct (Nießbrauch), its capital value is deducted from the property value. This significantly reduces the taxable value of the gift – and the parents remain protected. Our guide Usufruct and right of residence explains the differences.

Land transfer tax and speculation period

• Gifts to children, grandchildren and spouses are exempt from land transfer tax (Grunderwerbsteuer).
• For a later sale, the child takes over the parents' acquisition data; the ten-year speculation period continues to run. More under Speculation tax.

Protecting the parents

A notarial transfer agreement should contain reversion rights (Rückforderungsrechte), for example in the event that

• the child sells or encumbers the property without consent,
• the child dies before the parents,
• insolvency proceedings are opened over the child's assets,
• the child divorces and the property could fall into the equalisation of accrued gains (Zugewinnausgleich).

In addition: if parents become needy within ten years of the gift, for example due to care costs, the social welfare authority may, under certain circumstances, reclaim the gift (§ 528 BGB).

Compulsory share and siblings

Gifts to one child can trigger supplementary compulsory share claims (Pflichtteilsergänzungsansprüche) from the siblings. The value of the gift is reduced by 10% for each year after the gift – however, where a usufruct is reserved, this period only begins when the usufruct ends. A clear arrangement with all children, for example through waivers of the compulsory share or compensation payments, prevents disputes.

Tax rates when the allowance is exceeded

If the value of the gift exceeds the allowance, the excess amount is taxed. For children, grandchildren and spouses (tax class I), these rates apply:

For property in Upper Franconia, many families do not even use up the €400,000 allowance per parent. The tax becomes relevant above all with several properties, with gifts to nieces, nephews or unmarried partners – and when other assets have already been given away within ten years.

Worked example: apartment building to the daughter

A father transfers an apartment building in Kulmbach to his daughter. Taxable value according to the tax office: €620,000. He reserves the usufruct (father aged 68, annual net income €30,000).

Without the usufruct, the daughter would have been €220,000 above the allowance and would have paid around €24,000 in gift tax. At the same time, the father continues to receive the rents. The actual figures depend on the valuation, age and the multipliers applicable at the time – the tax advisor will calculate this bindingly.

The family home: tax-free between spouses

Spouses and registered civil partners can give each other the owner-occupied family home tax-free during their lifetime – regardless of its value and without it counting against the allowance (§ 13 ErbStG). There is no holding period. This is an elegant way of balancing assets within a marriage.

For children, the exemption only applies in the case of inheritance: they must then live in the family home themselves for ten years, and only 200 m² of living space qualifies. For a lifetime gift to children, the family home exemption does not apply. More on inheritance in our guide Inheritance.

Caution: mixed gift and speculation period

If, as part of the transfer, the child takes over an existing loan of the parents or pays compensation to siblings, the transfer is partly for consideration – a so-called mixed gift (gemischte Schenkung). For tax purposes, the part for consideration is treated like a sale. For let properties that the parents bought less than ten years ago, this can trigger speculation tax. A reserved usufruct or right of residence, by contrast, is not regarded as consideration.

Transferring step by step

Instead of giving away the whole house at once, it can make sense to transfer it in co-ownership shares – for example, one share every ten years. This allows the allowances to be used several times, and the parents retain a say for longer. The disadvantage: each transfer incurs notary and land register fees, and fractional ownership makes later decisions more complicated.

How a transfer works

1. Valuation of the property to estimate the taxable value and market value – see free valuation.
2. Advice from a tax advisor and notary: allowances, structuring, protection, compulsory shares.
3. Draft contract by the notary with right of residence or usufruct, reversion rights and, where applicable, waivers of the compulsory share.
4. Notarisation – all parties sign at the notary's office.
5. Land register (Grundbuch): registration of the child as owner, registration of the rights in Section II.
6. Notification: The notary reports the gift to the tax office. The tax office may then request a gift tax return.

When a sale is the better solution

A gift is not right for every family. A sale – to a child or to third parties – can make more sense if the parents need the money for their retirement or care, if no child wants to use the property, or if several children are to be treated equally. A property annuity (Immobilienverrentung) is also an alternative. A realistic market value helps with the decision – as does a look at the process under Selling a property.

Gifts with something in return: care and support

Many transfers within the family are not pure gifts. Often the children undertake in return to care for the parents, to maintain the house and garden or to make a monthly payment. Such consideration:

• reduces the taxable value of the gift if it is specifically agreed and can be valued,
• can reduce the siblings' supplementary compulsory share claim, because only the gratuitous part counts,
• creates clarity about who takes on which tasks.

Care obligations should be worded realistically – for example as an obligation to organise care and to help in the household, not as comprehensive personal care around the clock. The notary will help with a workable wording.

The family conversation: often more important than tax

The greatest challenge in a transfer is rarely the tax, but the family. An open conversation with all the children before the notary is instructed has proven its worth:

1. What do the parents want – and what do they need for their own security?
2. Which child should receive the property, and why?
3. How will the other children be compensated – immediately, later in the inheritance or not at all?
4. What happens if the child receiving the gift later wants to sell the property?
5. How will care and support for the parents be divided?

A transparent valuation of the property helps to set compensation payments fairly. We value neutrally and explain to everyone involved how the value is arrived at – see free valuation.

Gifting a let property

If a let property is given away, the tenancy agreements pass to the recipient. In future, the child pays tax on the rental income and continues the parents' depreciation (AfA). If the parents reserve a usufruct, the rental income stays with them – as does the obligation to pay tax on it. For let properties there is also a 10% valuation discount for gift tax if certain conditions are met. More on depreciation under Depreciation on property (AfA).