An apartment (under mortgage) as a gift to our child

[Nixon]

Hello all,

We are thinking of a possibility to gift our children an apartment in future, so we would like to know what could be future implications. Taxation for us and a child when she and she would get it.

Here is our idea.

1. Two of us (German residents) buying an apartment in Munich. For example 25/50/100K down payment, 250K mortgage. We pay all related expenses (Tax, notar, makler, etc...). We are paying the mortgage, renting it out for a time before we give it to our daughter. We would use the paid mortgage interest to offset our income, act with like it is ours, since it would be
2. In 5/10/whenever years (she is now 18), once she starts working and becomes capable of paying a mortgage by herself we would gift it to her. She would have to take over the mortgage, if she would not have enough cash to pay it out.

Our question is:
- How that ownership transfer would occur? What would be the expenses? Grundwerbsteuer, Notar, Grundbucheintrag, how the mortgage would be transferred from us to her? Since we have two daughters, we believe that we would be doing the same for the second one too.
- How is the value of the gift seen at that moment? If we decide to gift it to her after 5 years, and home equity goes from 50K (down payment at the time of purchase) to 75K during that period, and the home market value goes from 300k to 350K, is the gift's value 75K or 350K, or something else?
- I know there is a 400K/10 years inheritance limit exclusion in Germany, so I am assuming that this would not be reached, especially since my wife and I would be doing it jointly (800k limit in this case, if I am not wrong).
- Is there any other cost that we are not aware of, or any better idea how to make this work better?

And to add to the equation, all 4 of us are US citizens too. There is a $38K limit per year gift exclusion, but if the gift would be larger than that there is a lifetime inheritance exclusion currently of $13.99M which I am assuming would not be reached: https://blog.taxact.com/gift-tax-calcul ... -tax-free/

Regards,

Nixon

[sam]

Giving a property subject to an outstanding mortgage sounds like something the bank would not normally permit, so when it gets to it you might have to sell it for cheap to her instead e.g. if the flat is worth €250k and the mortgage needing being paid off is €100k she gets a new mortgage of that amount (or a little bit more to cover any costs) and buys the property off you for €100k allowing you to pay your mortgage off with the proceeds.

The practical issues I can see with this are

- what if she doesn't want to stay in Munich? Are you ok with her letting out or selling it? (Geschenk ist Geschenk).

- any advice wiser heads than me can give in legal arrangements, tax etc will be on the way it works now and a lot can change in six years

- going in with a hope and a prayer you can do the same for the second child sounds like risking resentment if it turns out you can't. What about just buying it for now if it stacks up as an investment, but not promising anything to either child. If it turns out you only have capacity to buy the first property you could potentially make it available to each of them to live in in turn while eg studying and do some equalisation if one of them wants to take it off you down the line. If it turns out you can manage two flats you can revert to your original plan.

[PandaMunich]

- How that ownership transfer would occur?

That would be a contract at the Notar about a mixed donation (gemischte Schenkung), since the amount of the mortgage that your child would take over would be like you had received payment in amount of that outstanding mortgage, since she would ease you of this debt, so this part would be a sale.
And the difference between the market value of the apartment at that time and the time value of that mortgage would be a gift.
Please read this: https://www-juhn-com.translate.goog/fac ... r_pto=wapp

What would be the expenses? Grundwerbsteuer, Notar, Grundbucheintrag,

No Grunderwerbsteuer, since there is none for gifts, see § 3 Nr. 2 GrEStG: https://www.gesetze-im-internet.de/grestg_1983/__3.html
And for the sale part, there is no Grunderwerbsteuer for sales between parent and child, see § 3 Nr. 3 GrEStG and here: https://grunderwerbsteuer-de.translate. ... r_pto=wapp

Notar and Grundbucheintrag (registering her name in the land register) would be the normal costs, yes.

how the mortgage would be transferred from us to her?

You would have to ask the bank, but be prepared that they don't agree and that your daughter has to get a new mortgage.
In that case, your mortgage lender will ask you to pay them a compensation called Vorfälligkeitsentschädigung (prepayment penalty) to compensate them for the amount of interest they are missing out on by you cutting the mortgage short: https://www-test-de.translate.goog/Bauk ... r_pto=wapp

or any better idea how to make this work better?

If you think you will get anywhere near the 400k€ limit every 10 years with your other assets, look into doing a Nießbrauch (usufruct) to lower the value of the "gift" part of the apartment transfer.

Please read:

• scroll up to the start of the article: https://www-juhn-com.translate.goog/fac ... r_pto=wapp
• and this: https://www-steuerberatung--breit-de.tr ... r_pto=wapp

[Nixon]

Thank you Sam and Panda.

We appreciate your thoughts and information you posted.
We are thinking of starting something. We would keep the property for a longer time, at least 10 years.
Just thinking loudly, it is probably easier to have just one larger property than two, and sell it later on when we think that we should move that value to them. But who knows, maybe they would not be ready to accept it at the same time, or something else might happen by then.
As a parent you are trying to help, but sometimes it is hard to be right for everyone.

We will see.

Thanks again!