Usufruct (Nießbrauch): Transfer Your Property and Still Stay in Your Home

What is usufruct? The legal basis

Usufruct (Nießbrauch) is governed under German law by §§ 1030 ff. BGB (German Civil Code). Put simply: an asset, for example your property, is encumbered in such a way that a particular person is entitled to draw all the benefits from it. These benefits are not only the right to live there, but expressly also the income, that is, rental receipts.

This is what makes usufruct so powerful: the usufructuary may occupy the property themselves, but may equally well let it and keep the rent for themselves. Important points to know:

• Usufruct is a strictly personal right. In principle it is non-transferable (§ 1059 BGB) and expires on the death of the entitled person (§ 1061 BGB).
• It is effective against any subsequent owner, because it is anchored in the land register as a right in rem.
• It can be granted for life or for a fixed term.

Usufruct therefore differs fundamentally from a mere verbal arrangement within the family. It is legally secured and survives a change of ownership.

Usufruct or right of residence? The decisive difference

Many owners confuse usufruct with the right of residence. Both ensure that you can remain in your home, yet their scope is very different. The right of residence under § 1093 BGB (Wohnrecht) is a limited personal easement and permits only that you live in the dwelling yourself.

Usufruct goes considerably further:

• Right of residence (§ 1093 BGB): You may use the rooms yourself for residential purposes. Letting to third parties is generally not provided for.
• Usufruct (§§ 1030 ff. BGB): You may live there yourself or let the property and keep the rental income. In economic terms you are positioned almost like an owner.

Precisely when your circumstances in life change, for instance on moving into assisted living, the strength of usufruct becomes apparent: you could then let the property and use the rental income to finance part of the new accommodation costs, even though the house legally already belongs to your children. Whether usufruct or a right of residence suits you depends on your personal goals. We are glad to provide an initial assessment; your notary then handles the formal notarisation.

Reserved usufruct: transfer during your lifetime, keep your security

The most common arrangement in practice is the reserved usufruct (Vorbehaltsnießbrauch). In this case you transfer ownership of your property to your children or other close persons free of charge, but at the same time reserve for yourself a lifelong usufruct.

The result:

• Ownership passes to the next generation already during your lifetime. This is the classic anticipated succession.
• You yourself retain the full right of use: continuing to live there, continuing to let, continuing to collect rent.
• The children become owners, but during the term of the usufruct cannot use the property themselves against your wishes or freely dispose of it.

For many families this is the ideal combination of care and self-determination. You arrange your estate early and in an orderly manner, pass on the family assets and at the same time secure your home and your financial independence. Disputes among heirs can often be avoided in this way from the outset.

Saving tax: how usufruct lowers gift tax

Reserved usufruct is attractive not only emotionally but also financially. Anyone who gifts a property generally triggers gift tax. This is where the twofold advantage comes in.

Firstly, the tax-free allowances: Under § 16 ErbStG (Inheritance and Gift Tax Act), every child may receive 400,000 euros tax-free from one parent every ten years, and spouses even 500,000 euros. Those who transfer early can make use of these allowances several times over the years.

Secondly, the reduction in value: If you reserve a usufruct for yourself, its capitalised value is deducted from the value of the gift. After all, the children initially receive an encumbered property. The capitalised value is calculated under the German Valuation Act: the annual value of the use (regularly the annual net rent) is multiplied by an age-dependent factor (§ 14 BewG, Annex 9). The younger the usufructuary, the higher the reduction.

• One important cap: under § 16 BewG, the annual value may amount to no more than the property value divided by 18.6.
• The former prohibition on deduction under § 25 ErbStG was abolished with the 2009 inheritance tax reform. The capitalised value of the usufruct is therefore today fully deductible.

In total, the taxable value of the gift may fall so far that it slips below the tax-free allowance and no gift tax arises at all. A reliable calculation for the individual case is carried out by your tax adviser. The basis for this, however, is a realistic valuation of your property, and this is precisely where we support you.

Usufruct in the land register and the day-to-day obligations

For usufruct to come into being with legal binding force, it must be entered in the land register, specifically in Section II, where encumbrances and restrictions are recorded. The agreement is notarised; only the entry makes the right effective against third parties (§ 873 BGB).

Usufruct also entails obligations. German law allocates them clearly:

• The usufructuary bears the running charges and ordinary upkeep, for example property tax, insurance, minor repairs and customary maintenance (§§ 1041, 1047 BGB).
• The owner generally bears extraordinary expenditure, that is, larger measures affecting the substance of the property, unless otherwise agreed by contract.

This allocation can be adjusted individually in the transfer agreement. It is particularly worthwhile here to create clarity from the outset, so that no disagreements about costs arise later between the generations.

Selling a property encumbered with usufruct: what you need to know

Circumstances in life change. Sometimes a property encumbered with a usufruct is to be sold after all, whether to finance care or because the family is reorganising itself. This is possible, but needs to be well prepared.

Three points are important:

• The owner may sell the property; the usufruct concerns only the use, not the disposal. The buyer then takes over the property encumbered with the usufruct, because it has effect in rem.
• If the property is to be sold free of encumbrances, the participation of the usufructuary is required. They must waive their right so that it can be deleted from the land register (§§ 875, 1061 BGB). In practice this is often done in return for a settlement payment based on the capitalised value of the usufruct.
• A registered usufruct has a value-reducing effect. Buyers who wish to move in themselves or to let factor in the loss of use.

This is precisely where the value of experienced guidance lies. Through our network, grown over decades, with more than 20,000 contacts in Düsseldorf and North Rhine-Westphalia, we approach, on request, specific prospective buyers for whom a property encumbered with usufruct or let to tenants may be of interest, for example capital investors, discreetly and outside the public portals. We value your property in line with the market, structure the redemption together with your notary and bring sellers, owners and usufructuaries to one table. We are at all times open to cooperation with other estate agents.