If real estate is sold within the 10-year period following acquisition, it is subject to income tax pursuant to § 23 (1) No. 1. But how is the case to be assessed if the property is withdrawn from business assets without taxation and only sold thereafter?
This question is to be clarified in pending proceedings before the FG Rheinland-Pfalz. In the case at hand, a farmer transferred real estate from his business assets tax-free to his two sons by way of anticipated succession. However, when withdrawing the property from the business, the farmer applied only its book value, leaving the hidden reserves concealed. Consequently, the farmer recorded no additional profit from agriculture and forestry, although the actual market value of the property far exceeded its book value. After the testator's death, the two sons intended to sell the property within the 10-year period following its withdrawal from the business.
Dispute over the Calculation of the Capital Gain
The co-ownership argued that, for the purpose of calculating the gain, the going-concern value (the value an acquirer would assign to the individual asset) at the time of withdrawal should be offset against the sale proceeds. The tax office, by contrast, offset the sale proceeds against the book value at the time of withdrawal when calculating the capital gain. This significantly increased the capital gain.
Decision of the FG Rheinland-Pfalz
In its decision, the FG Rheinland-Pfalz sided with the tax office's calculation. Under the principles of the Income Tax Act, the acquisition of an asset held as private property (§ 23 (1) EStG) also includes, pursuant to § 23 (1) sentence 2 EStG, the transfer of an asset from business assets into private assets. Furthermore, with regard to anticipated succession, § 23 (1) sentence 3 must be observed. This provision states that, in the case of a gratuitous acquisition, the acquisition or transfer of the asset into private assets by the legal predecessor is attributed to the individual legal successor for the purposes of this provision. In the case at issue, this means that the withdrawn property, following its transfer into private assets, is attributed to the individual legal successors, i.e. the two sons. Pursuant to § 23 (3) No. 1 EStG, the capital gain is determined on the one hand by the sale price and on the other by the acquisition or production costs, including income-related expenses. In the case of a withdrawal from business assets, the provisions of § 6 (1) No. 4 EStG must be observed in accordance with § 23 (3) sentence 3. In the view of the FG Rheinland-Pfalz, pursuant to § 6 (1) No. 4 EStG, the withdrawal value is to be used as the basis for calculating the capital gain.
Appeal Before the BFH Unsuccessful
The BFH likewise rejected the co-ownership's appeal. The BFH ruled, similarly to the FG Rheinland-Pfalz, that in the case of a withdrawal pursuant to § 23 (3) sentence 1 EStG in conjunction with § 6 (4) sentence 1 EStG, the withdrawal value is to be applied. The reason given was that the legal predecessor (the farmer) had withdrawn the property from his business in a tax-neutral manner, with the result that the book value at the time of withdrawal must correspondingly be used to determine the gain from the private sale transaction.
Frequently asked questions
Frequently asked questions
Does the withdrawal of real estate from business assets qualify as an acquisition within the meaning of § 23 EStG?
Yes. Under § 23 Abs. 1 S. 2 EStG, the transfer of an asset from business assets to private assets is treated as an acquisition. If the property is sold within 10 years of the withdrawal, this constitutes a taxable private sale transaction. The date of withdrawal is decisive for the start of the 10-year period.
Which value is to be used as acquisition costs for the private sale transaction in the case of a tax-neutral withdrawal?
If the property was withdrawn from business assets on a tax-neutral basis at book value, the FG Rheinland-Pfalz and the BFH hold that this book value (withdrawal value) must be used as acquisition costs within the meaning of § 23 Abs. 3 EStG. The going-concern value (Teilwert) or fair market value at the time of withdrawal cannot be applied. As a result, the hidden reserves are only taxed upon the subsequent sale from private assets.
How does anticipated succession affect the calculation of capital gains?
In the case of a gratuitous acquisition, pursuant to § 23 Abs. 1 S. 3 EStG, the acquisition or transfer into private assets by the predecessor is attributed to the individual legal successor. The heir or donee therefore steps into the tax position of the transferor. Accordingly, the predecessor's withdrawal date and withdrawal value are decisive.
Why is the book value, rather than the fair market value, decisive in a tax-neutral withdrawal?
The BFH reasons that in a tax-neutral withdrawal, the hidden reserves were not realized and taxed within the business. Valuing the asset at fair market value would mean these reserves remain permanently untaxed. Consequently, for purposes of § 23 EStG, the book value must also serve as the acquisition cost, ensuring that the hidden reserves are captured upon a subsequent sale.
What are the practical consequences of the ruling for sales of withdrawn properties?
Anyone who withdraws a property from business assets without recognizing profit and sells it within 10 years must fully tax the difference between the sales price and the book value as other income under § 23 EStG. This also applies to heirs and donees in the context of anticipated succession. No step-up to fair value for tax purposes takes place.