Anyone gifting a property first asks: how much tax is due? Gift tax (Schenkungssteuer) depends on the family relationship, the value of the property and personal allowances. This guide focuses on the tax itself: which tax class and which tax rate apply, how high the allowances are, how the tax office values your property, and which arrangements such as usufruct (Nießbrauch), chain gifting or the family-home exemption can lawfully reduce the burden. The decisive laws are the Inheritance and Gift Tax Act (ErbStG) and the Valuation Act (BewG). This information does not replace individual tax advice; rather, it helps you gauge the orders of magnitude and enter the consultation well prepared.
Tax classes: how is the recipient related to the donor?
How high the gift tax (Schenkungssteuer) turns out depends decisively on the family relationship between the donor and the recipient. The law divides recipients into three tax classes (§ 15 ErbStG). The closer the relationship, the more favourable the tax class, the higher the allowance and the lower the tax rate.
- Tax class I: spouses and registered civil partners, children and stepchildren, grandchildren and further descendants. Note: parents and grandparents belong to class I only in the case of inheritance; in the case of a gift, however, they fall into class II.
- Tax class II: parents and grandparents in the case of gifts, siblings, nieces and nephews, stepparents, children-in-law, parents-in-law and divorced spouses.
- Tax class III: all other recipients, such as unregistered partners, distant relatives or friends.
This classification sets the course for everything that follows. The difference between class I and class III alone can quadruple the tax rate, as the next section shows.
Allowances and the 10-year rule
Before the actual tax comes the personal tax-free allowance (Freibetrag) under § 16 ErbStG. Up to this amount the gift remains entirely tax-free. Only the value exceeding it is taxed. The allowances apply per donor and per recipient:
- Spouses and registered civil partners: 500.000 Euro
- Children and stepchildren, as well as grandchildren whose parents are already deceased: 400.000 Euro
- Grandchildren whose parents are still living: 200.000 Euro
- Great-grandchildren: 100.000 Euro
- Parents and grandparents in the case of a gift (tax class II): 20.000 Euro
- Siblings, nieces, nephews and all other persons in tax classes II and III: 20.000 Euro
The most important lever is the 10-year rule (§ 14 ErbStG): all gifts from the same person to the same person within ten years are added together. Conversely, this means that once ten years have elapsed, the full allowance is restored and can be used again. Anyone who transfers early and in stages can thus pass on considerable values tax-free over the years. In addition, the allowance applies per parent. Within ten years, a father and mother can therefore gift a child up to 800.000 Euro tax-free in total.
Tax rates: how much you pay above the allowance
If the value of the gifted property exceeds the allowance, only the excess portion is taxed, the so-called taxable acquisition. The tax rate rises with the size of the acquisition and depends on the tax class (§ 19 ErbStG):
- up to 75.000 Euro: class I 7 percent, class II 15 percent, class III 30 percent
- up to 300.000 Euro: class I 11 percent, class II 20 percent, class III 30 percent
- up to 600.000 Euro: class I 15 percent, class II 25 percent, class III 30 percent
- up to 6.000.000 Euro: class I 19 percent, class II 30 percent, class III 30 percent
- up to 13.000.000 Euro: class I 23 percent, class II 35 percent, class III 50 percent
- up to 26.000.000 Euro: class I 27 percent, class II 40 percent, class III 50 percent
- over 26.000.000 Euro: class I 30 percent, class II 43 percent, class III 50 percent
An example: a father gifts his daughter (tax class I, allowance 400.000 Euro) an apartment with a tax value of 500.000 Euro. The taxable amount is 100.000 Euro. As this amount falls within the bracket up to 300.000 Euro, a rate of 11 percent applies, that is 11.000 Euro in gift tax. What is always decisive for placement in the value bracket is the entire taxable acquisition, not a tiered calculation.
How the tax office values the property
For gift tax, what counts is not the purchase price of years ago but the current assessed value (Grundbesitzwert), which the tax office determines under the Valuation Act (§§ 157 ff. BewG). This is intended to correspond to the common value, that is the market value. Which procedure is applied depends on the type of property:
- Comparative value method (§ 183 BewG): generally for condominiums as well as single- and two-family houses, based on the purchase prices of comparable properties.
- Income value method (§§ 184 ff. BewG): for rental, commercial and mixed-use properties, based on the achievable returns.
- Asset value method (§§ 189 ff. BewG): where no comparative or income value can be determined, for example with special owner-occupied properties.
The tax office's standardised methods can exceed the actual market value, for example in the case of a renovation backlog or an unfavourable layout. In that case you are permitted under § 198 BewG to demonstrate a lower common value, usually by means of a qualified market-value appraisal or a sale price achieved at around the same time. If the real value lies below the official assessment, the assessment base falls and with it the tax. A realistic, market-appropriate estimate of the value is therefore the starting point of any planning.
Usufruct and right of residence reduce the taxable value
An effective and entirely lawful lever for reducing gift tax is reserving a usufruct (Nießbrauch) or a right of residence. The recipient then receives the property only encumbered, and it is precisely this encumbrance that reduces the taxable value.
The value of the reserved right is calculated as a capital value under § 14 BewG: the annual value of the use multiplied by a factor that depends on the statistical life expectancy of the beneficiary. The younger the donor, the higher the factor and thus the deduction. The annual value is, however, capped: it may amount to no more than the assessed value (Grundbesitzwert) divided by 18,6 (§ 16 BewG).
A simplified example: a rented property has an assessed value of 600.000 Euro, the annual value of the usufruct (net rent) is 24.000 Euro, the factor according to the official table is 12. The capital value then amounts to 288.000 Euro. Deducted from the assessed value, a tax value of 312.000 Euro remains. On transfer to a child (allowance 400.000 Euro) no gift tax at all is therefore due. Note: where the donor reserves a usufruct, the 10-year period for other legal consequences, for example regarding the compulsory portion, often does not begin to run according to case law as long as the donor remains economically in control of the asset.
Family-home exemption and chain gifting
Beyond allowances and valuation, the law recognises two particularly effective arrangements.
The family-home exemption is the most far-reaching exception: if one spouse transfers to the other the jointly owner-occupied property during their lifetime, this gift remains entirely tax-free under § 13 Abs. 1 Nr. 4a ErbStG, namely without a value limit, without an area limit and without being counted against the allowance of 500.000 Euro. The condition is that a dwelling in the property is used for the spouses' own residential purposes. Caution: for children, the family-home exemption applies only in the case of inheritance (§ 13 Abs. 1 Nr. 4c ErbStG), limited to 200 square metres of living space and tied to ten years of own use. A gift of the family home to children is not covered by it.
The chain gift makes clever use of the allowances where a direct transfer would be costly. Example: a mother-in-law wishes to give a property to her son-in-law. Directly, he would fall into tax class II with an allowance of only 20.000 Euro. If she first gifts the property to her own daughter (allowance 400.000 Euro) and the daughter then transfers it to her husband (allowance 500.000 Euro), the tax can be reduced considerably. According to the case law of the Federal Fiscal Court (Bundesfinanzhof), what is decisive is that the intermediate person can dispose freely of the gift and is not subject to any obligation to pass it on. If the passing-on is bindingly agreed from the outset, the tax office treats the transaction as a direct gift to the ultimate recipient.
Reporting obligation and the difference between gift and inheritance
A gift must be reported to the tax office. Under § 30 ErbStG, both the recipient and the donor are obliged to report the acquisition within three months to the competent inheritance and gift tax office. An important relief: if the gift of the property is notarised, which is mandatory for real estate in any case, the notary handles the report, and an additional notification by the parties is generally unnecessary. The tax office then decides whether to request the filing of a tax return.
For tax purposes, gift and inheritance are largely treated alike: the same tax classes, the same allowances, the same tax rates. There are, however, differences:
- Multiple allowances: with a gift made during one's lifetime, the allowances can be used multiple times via the 10-year rule. In the case of inheritance the allowance is available only once.
- Pension allowance: the additional pension allowance under § 17 ErbStG for spouses and children exists only in the case of inheritance, not with a gift.
- Plannability: a gift can be structured deliberately, for example with usufruct (Nießbrauch) or staggered over the years. Inheritance, by contrast, occurs unpredictably.
Whether transfer during one's lifetime or bequest is more favourable for tax depends on the assets, the family situation and the time horizon. This can only be assessed individually.
