Latent taxes, chain transactions etc.

The following tax-related pitfalls should be avoided:

  • So-called latent taxes
  • The taxation of successive legal transactions and chain transactions
  • The aggregation of land and building contract value in taxation

In the case of real estate transfers under tax deferral status (e.g. gifts, advances on inheritance, distribution of estate etc.), the accepted value can not be claimed as the authoritative investment cost. The tax authorities apply the acquisition price paid by the previous owner. Despite the loss, in relation to the acquisition price paid by the previous owner a taxable profit has arisen. If the transferee sells below the price charged to him, i.e. at a loss, a profit may have arisen nonetheless from the point of view of real estate taxation: in the case of deferred taxation the period of ownership in addition to earlier increases in value will be imputed to the transferee. If the transferee does not wish to pay this amount of tax out of his own pocket, the accepted value must be reduced on transfer by the amount of the so-called latent taxes or a negotiated lump sum.

Owners of large areas of real estate (mostly inherited), who are willing to sell, normally are unable to do so without a project study or even an approved building project. To realise a sale, they can rarely get by without the help of professionals, such as architects and building contractors who, although not interested in buying the land as it would tie up their financial resources, nonetheless wish to offer new housing to potential buyers. Typically, the owner sells the land to the ultimate purchaser with whom the professional builder closes a contract for building works. This interaction between landowner and professional builder generally leads to a chain transaction and the aggregation of land price and building costs. If the tax authorities assume the formation of a simple company (consisting of landowner and building contractor), first the acquisition of half of the share in the land is assumed (chain transaction), then the value of the land is added to the building costs (real estate tax is also charged on the value of the buildings!). If a simple company did not exist (the owner selling the land did not take part in the realisation of the building project), the tax authority works on the basis of transfer of ownership of the building land (land acquisition by the building contractor) and then aggregates land and buildings for the real estate tax declaration.

– Chain transactions and aggregations can subsequently be regulated by the tax authorities and may be assessed on a different basis than agreed in the purchase contract or original provisional declarations: A long period in possession has an effect in the case of transfer of ownership tax in the community of heirs/building contractor relationship while in the building contractor/ultimate purchaser relationship, supplementary taxation on the basis of the short period in possession comes into play with a higher tax rate and the aggregation of land and buildings. As far as real estate gains tax is concerned in the community of heirs/building contractor relationship, the basis is the land purchase price (long time in possession, low tax rate); in the building contractor/ultimate purchaser relationship the land price and building costs are aggregated, whereas low building prices due to competition and marketing costs normally only generate low profit (short time in possession, high tax rate due to progression; the building contractor is the main party affected).

“Chain transaction and aggregation taxation” in the case of the building contractor lead to a greater tax burden and in the case of the ultimate purchaser higher transfer of ownership tax or greater liability risks (shared liability for higher transfer of ownership tax / too low coverage of real estate taxes or risk of real estate tax liens for two or more legal transactions with a higher total amount). The transfer of these additional taxes from the ultimate purchaser to the building contractor often causes disputes and depends on the business practices and/or liquidity of the building contractor.

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