The demolition of your parent’s home post-inheritance may lead to a retrospective loss of tax-exempt status. That was the verdict of the Finanzgericht (FG) Düsseldorf – the Fiscal Court of Düsseldorf – in a judgment from January 8, 2020 (Az.: 4 K 3120/18 Erb).

Children who inherit real estate from their parents can receive an exemption from estate tax even if they go over their personal tax allowance of 400,000 euros. We at the commercial law firm MTR Rechtsanwälte note that this is conditional on the heirs personally occupying the property for the next ten years and the living space not exceeding 200 square meters.

Heirs must nonetheless tread carefully if they decide to have the inherited family home demolished within this ten-year period, as this may result in estate tax being imposed retrospectively. That was the verdict of the Finanzgericht Düsseldorf in a recently published judgment from January 8, 2020. According to the ruling, the tax can be levied even if the house exhibits significant defects and was demolished for that reason.

The proceedings before the FG Düsseldorf concerned a daughter who had inherited her parent’s house in 2009. She went on to personally occupy the property for the next seven years, after which time it became increasingly difficult for her to reach her second-floor apartment and installing a stair lift did not seem appropriate given the poor structural condition of the house. She therefore ultimately decided to have the building demolished.

Since she had thus only personally occupied the inherited property for a mere seven years, the competent tax office subsequently demanded payment of estate tax. The heiress’s appeal against the tax assessment notice was unsuccessful.

The FG Düsseldorf held that the authorities were due retrospective payment of estate tax because the demolition of the house had occurred within the ten-year period. The court went on to state that even though the reasons for the demolition were understandable, no compelling reason had been presented given that personally occupying the property had still been a possibility.

Heirs should therefore tread carefully if they decide to give up the inherited family home within the ten-year period. In the absence of genuinely compelling grounds justifying this course of action, the tax authorities may come knocking at their door.

Lawyers with experience in the field of tax law can serve as advisors.

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