Usufruct and Right of ResidenceTwo Rights, Big Differences

The Right of Residence

The right of residence (Wohnungsrecht, § 1093 BGB) entitles the holder to live in a building or part of it, to the exclusion of the owner. The holder may take in family members and carers. They may not let it – unless the owner agrees.

The allocation of costs is only partly governed by law and should be set out in the contract: it is customary for the holder to bear the consumption-based costs and the owner larger maintenance work.

Usufruct

Usufruct (Nießbrauch, § 1030 BGB) is more comprehensive: the usufructuary may use the property themselves or let it and keep the rental income. Economically, they therefore remain almost like an owner – they just cannot sell or encumber it.

In return, the usufructuary bears, by law, the ordinary maintenance costs and the ongoing public charges (e.g. property tax, Grundsteuer). They do not have to pay for extraordinary renewals – such as a new roof. Different arrangements can be agreed.

Comparison at a Glance

Effects on Value

A lifelong right of residence or usufruct considerably reduces the market value. The value of the right is calculated from the annual use value (e.g. the rent saved) and the capitalisation factor based on the life table. The younger the holder, the higher the discount.

Example: A house with an unencumbered value of €300,000, annual rent saved €9,600, holder aged 75. Depending on the factor, the capital value of the right of residence can be around €90,000 to €110,000. For a buyer, the house is worth correspondingly less.

Selling a Property with a Right of Residence

A registered right of residence or usufruct remains in place when the property is sold. Buyers who want to move in themselves are therefore usually ruled out. Options:

• Sale to investors with a corresponding price discount,
• Waiver of the right in return for a compensation payment to the holder,
• Deletion after the holder's death, with the death certificate.

Tax Effect on Gifts

If parents reserve a right of residence or usufruct when transferring to their children, the capital value of the right is deducted from the value of the gift. This can reduce gift tax (Schenkungsteuer) significantly. More on this in the guide Transferring a property to children.

How the Value of the Right Is Calculated

For tax purposes, the capital value of a lifelong right is determined according to the Valuation Act (Bewertungsgesetz): the annual value of the use multiplied by a multiplier that the Federal Ministry of Finance publishes every year on the basis of the current life table. The multiplier depends on age and sex – women have a higher life expectancy and therefore higher factors.

The exact multipliers change every year; the table for the year of transfer is decisive. Similar principles are applied when valuing for a sale on the market, supplemented by the question of how many buyers would even consider an encumbered property. General information on valuation can be found under Property valuation.

Types of Usufruct

For tax purposes: with a reserved usufruct on a let property, the usufructuary may continue to claim depreciation, because they originally bore the acquisition costs themselves. With a granted usufruct, this is generally not possible. More on depreciation under Depreciation (AfA) on property.

When Care Becomes Necessary: the Social Welfare Office Risk

An often underestimated point: anyone who gives away their house and becomes needy within ten years afterwards – for example because the costs of a care home exceed their pension – can reclaim the gift under § 528 BGB. If the social welfare office (Sozialamt) steps in to pay for the care costs, it can transfer this claim to itself and demand compensation for the value from the children.

A right of residence or usufruct does not fundamentally change this. Although it reduces the value of the gift, it does not protect against the claim for return. What helps:

• transfer early, so that the ten-year period is as likely as possible to expire,
• agree consideration (a care obligation, taking over loans) that reduces the gift portion,
• make provisions for a move into care: what happens to the right of residence if the parents move into a care home permanently? May the property be let, and who is entitled to the rent?

Notarial advice is indispensable here. General information on transfers in the guide Gifting a property, alternatives for senior citizens under Equity release (Immobilienverrentung).

What Belongs in the Transfer Contract

A good contract governs not only the right itself, but also everyday life:

1. Scope: the whole house, one apartment or individual rooms, shared use of the garden, cellar, garage
2. Costs: who pays for heating, electricity, property tax, insurance, cosmetic repairs, major maintenance
3. Letting: whether and under what conditions
4. Move into care and nursing: what applies in the case of a permanent move out
5. Rights of reclaim: for example if the child dies before the parents, divorces, becomes insolvent or sells the property without consent
6. Ranking in the land register: whether the right should be subordinated for a later financing by the children

Alternatives to the Right of Residence

A right in rem is not always the best solution:

• Tenancy agreement: the parents rent the property back at a low rent. More flexible, but terminable and treated differently for tax purposes.
• Life annuity or sale to the children: the children pay monthly; this can improve the parents' retirement provision.
• Equity release with third parties: if no child wants to take over the property, see Equity release.
• Sale and rent-back: known in the commercial sector as sale and lease back, less common for residential property.

Buying a Property with a Right of Residence

For buyers, a property with an existing right of residence or usufruct can be an interesting investment – at a significantly reduced price. Typical situations:

Anyone buying in this way should read the right carefully: who bears which costs? May the holder let the property? What applies if they move into a care home? And how is the price discount calculated? Banks are more cautious about financing such purchases, because the property's value as security is restricted.

Buying Out the Right: an Example

A daughter has inherited her parents' house; her late father's partner (72 years old) has a lifelong right of residence in the ground-floor apartment. The daughter wants to sell. A buy-out is possible: the holder waives her right in return for a one-off payment and moves into a smaller apartment.

Without the buy-out, the daughter could only have sold the house to an investor at a considerable discount. Buy-outs require trust and tact. We support such conversations and make sure that both sides have a fair basis.

Right of Residence and Care Homes: Three Solutions for the Contract

1. Right for the holder to let: if they move out permanently, they may let the apartment and use the rent for the care home costs.
2. Expiry against compensation: the right expires on a permanent move out, and the owner pays a fixed monthly amount.
3. Suspension of the right: the right remains in place but is suspended; the owner may use the rooms.

Which solution fits depends on the family, assets and care planning. Settling this early saves difficult negotiations later – and disputes with the social welfare office.