Housing credit – everything you need to know

For many property owners, it is important to bequeath their home to their children while they are still alive. Nevertheless, it is the desire of many parents to continue to live in the residential property. If you are looking for a legally secure way to do this, you can give away the house or apartment to your offspring and agree on a right of residence. Through this right of occupancy, real estate owners (real estate ownership – interesting facts and tips) can use the property or. Using some areas yourself without acting as owner or tenant. Potentially, this model is a viable option to avoid paying estate taxes at a later date.

Table of contents

Definition of residential right

The right of residence or. So-called residential right is a personal easement according to the german civil code (BGB). Pursuant to section 1093 of the german civil code, a personal easement exists that is tied to a specific person. The inheritance right is not inheritable or transferable to other people. The right of abode is associated with the following special features:

  • The right of residence is granted for a complete property or a part of it.
  • Those in possession of the right of residence may use the premises for themselves, family members or caregivers.
  • The agreement of the housing right is made in return for payment or free of charge.
  • Unless otherwise agreed, the right of residence continues even when a property is sold. The right of residence usually expires in the event of a foreclosure sale.
  • Agreements for the right of residence are concluded for a limited or unlimited term. Individual arrangements can be made according to need. The perpetual form – the so-called lifetime right of residence – expires with the death of the person concerned.

The right of residence should generally be registered in the land register. This land register entry is made by a notary public. Individual arrangements can also be made.

Differences from usufruct as well as perpetual right of abode

The right of usufruct as well as the right of permanent residence have some similarities, but nevertheless also glaring differences to the right of residence. The permanent residence right entitles its owner to use or rent out a residential property on his own without acting as the owner of the property. This agreement, made under the condominium act, is inheritable and may be transferred to other persons. Usufruct is an extended form of residential property right. If the right of residence includes exclusively a use of the house or apartment, the right of usufruct entitles to the use of all legally allowed uses. Accordingly, the beneficiaries even had a right to rent the object. Usufruct as well as residential right cannot be sold or inherited. However, rental income associated with the right of usufruct is subject to seizure by the social security office. The consequence: eligibility for social security may be reduced. Possibly, affected persons are completely excluded from eligibility for social security benefits.

Make contractual agreements

The housing law grants rights and obligations. To avoid misunderstandings, all details should be covered by a contract. The duration of the right of residence can be bound for life or tied to a fixed term. Often, the right to live lasts until people who are entitled to live there have to move into a nursing home, for example.

In addition, it is common for those entitled to live in the house to pay their own operating costs. In addition to notary fees, the owners of the right of abode usually agree to pay the costs of water, electricity and minor cosmetic repairs on their own. Financial expenses for extraordinary maintenance, on the other hand, are paid by the owners. Individual agreements may be made in the notary contract. These agreements address issues such as a settlement of operating expenses or the payment of ongoing user fees. Another agreement relates to the scope of the right to use. The right extends to either an entire building or only a portion of the building. In the case of a limited right of use, additional use of common facilities such as the kitchen can be agreed under certain circumstances. Residents are allowed to have their own family and persons needed for care in the premises. This regulation therefore includes the right of access for nursing staff.

Residential right contract

Can the right of residence be revoked??

Under special conditions, it is possible to revoke a gift and the associated right of residence within ten years. This right of revocation is granted in case the children get into financial distress or even become insolvent. This right to revoke the right of residence is intended to prevent a countervalue of the residential property from being used for debt repayment of the offspring when the parents are still alive.

Another option for a rescission is if the child predeceases his or her parents. In the case of impending impoverishment or due to gross ingratitude, the gift may also be revoked. If foreclosure is imminent after this ten-year period, the donation may not be reversed. In this legal situation, the ranking of the right of residence recorded in the land register plays a decisive role. A high risk exists if the bank is registered as creditor. Credit companies usually require an entry in the first ranking list in the land register. If a bank mortgage is registered at a higher level, the right of residence automatically expires. As a general rule, the revocation of the right of residence usually requires the consent of the beneficiary. If the property is sold during the lifetime of the beneficiary, the beneficiary and the new owners must reach an agreement.

Tax advantages and disadvantages

Families may benefit from tax advantages with an existing right of residence. If parents give a house or their condominium to their child and in return receive the right of residence, the daughters and sons receive an allowance of 400 euros for gift tax purposes.000 euro. If the parents do not die within ten years of the gift, this allowance may no longer be taken into account after their death when determining the inheritance tax. This allowance may be reclaimed every 10 years. Another advantage is to agree on rights of use like residential rights within the framework of a donation. Such rights of use automatically reduce the gift value. In the following cases, gifts are completely exempt from paying tax:

  • The donating and donated parties are related to each other in a straight line.
  • The donee occupies the residential property himself for a period of at least ten years.

In return, there are also some disadvantages from a tax law perspective. For example, a donee may be subject to gift tax if a beneficiary automatically relinquishes his or her right to the property. According to a ruling by the federal fiscal court, a gratuitous right of residence is considered an asset, so that a waiver of this entitlement is in turn considered a gift.

In addition, the granting of the right of residence for an unmarried couple can cause high costs. If one partner agrees to a lifelong right of residence for the other person, the surviving partner must pay inheritance tax on the right of residence after his or her death. In this process, the tax office uses the mortality tables of the federal statistical office to determine the statistically expected lifetime of the person entitled to the right of residence. The number of years remaining is then multiplied by the annual rent customary in the locality for similar residential properties. If you would like more information about the tax consequences of the right of residence, you should consult a lawyer or real estate agent if necessary. Legal or real estate experts, such as real estate agents, provide information in individual cases about the advantages and disadvantages offered by the right of residence in individual cases. Real estate agents are happy to provide information on the groups of people for whom the gift of a property to children, including the right of residence, appears to make particular sense.

For whom is the right of residence particularly suitable?

If real estate is given to children as a gift, the donees usually avoid paying inheritance tax. In turn, parents benefit from the security of being able to stay in their own home for the rest of their lives. This concept is particularly interesting for freelancers and entrepreneurs. For example, it is possible for entrepreneurs to give away the jointly used property to their partner and in return be granted a right of residence. If the traders become insolvent at a later date, creditors are not allowed to access the house or apartment. In addition, the right of abode is a lucrative solution for older property owners without children. Numerous commercial operators are interested in purchasing homes for the elderly. With this model, the owners benefit in return from a lifelong right of residence as well as an additional pension paid monthly. However, the profitability of these models must be examined on a case-by-case basis.

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