Inheriting real estate in Germany. Now what?

In Germany, every second inheritance includes the inheritance of property. These are often houses, villas and condominiums, but can also be capital investments, such as residential buildings. In either case, the question is: What do I do now?

A property inheritance can quickly turn out to be a nightmare, for example if the property is mortgaged or investments are needed for renovation measures. After all, you as the heir will be responsible for the mortgage and the investments. In this guide I would like to inform you about the most common pitfalls, that you know what to look out for.

1. Accept the inheritance or reject it?

You only have six weeks to decide whether or not to accept the inheritance. If you accept the inheritance, you become the so-called legal successor of the testator. This means that you also take over the rights (e.g. possession) and the obligations (e.g. the debts) of the testator.

This applies both to sole heirs and to a community of heirs.

If you don't want to accept the inheritance, you must reject it. You have six weeks to reject.

The decision whether to accept or reject the inheritance usually depends on whether the inheritance is valuable or in debt.

1.1. Is the estate in debt?

According to German law, the heir inherits not only the assets, but also the corresponding liabilities and debts. If the latter exceed the asset value, it makes little sense to accept the inheritance. Unless you have the possibility to pay off the debts and liabilities and want to accept the inheritance for non-financial reasons.

In simple terms: If you accept an inheritance, you also inherit all debts and are liable for them with your entire private assets. It is irrelevant whether you knew about the debts or not. If it turns out that the testator had loans or debts and these were overlooked, you are still liable for them.

Often a property that at first glance appears to be valuable turns out to be worthless because it is burdened with an expensive mortgage.

1.1.1. Thorough examination of the estate

In order to prevent unpleasant surprises, the entire estate should be thoroughly examined. In the case of real estate, this means that all entries in the land register are taken into account. Next, a property valuation should be carried out. Without knowing the exact value and condition of the property, you cannot make an informed decision. Some properties suddenly turn out to be in need of renovation and ultimately worthless. Others are larger than expected or are being traded particularly highly on the property market and are considerably more valuable.

Furthermore, all documents of the testator should be examined. Often you will find references to other inheritance objects and obligations. In my work as an estate administrator I have found old stocks and cash, worth several thousand to hundred thousand Euros, hidden between pages of books. On the - rather unpleasant - hand, documents about still running credit loans are unfortunately also often found in these documents.

Without a thorough examination of the estate, it is not possible to say whether the estate is over-indebted or not. At a second glance an over-indebted estate can suddenly prove to be very valuable, because the testator had a second bank account including a stock portfolio, that nobody knew about before.

1.2. The cost of an inheritance

An official certificate of inheritance is needed in all German cases. The costs for the certificate depend on the value of the estate. For example, for an inheritance with a value of 200.000€ the certificate will cost about 870€. The costs are exactly regulated by law.

If the land register of the real estate has to be rewritten, this can be done free of charge in the first two years after the inheritance. If this is done later, costs of several hundred to thousand euros can be incurred.

1.3. The inheritance tax

Inheritance tax may still be due on the entire inheritance. However, this only applies if the inheritance exceeds a certain allowance. The tax-free amount is rarely exceeded.

For spouses the tax-free amount is 500,000 €.

For children, the tax-free amount is 400,000€.

Only the assets that exceed these allowances are taxed. The inheritance tax is between 7% and 50% and depends on the tax class and the amount of the assets.

1.4. The decision

If the estate is not over-indebted, there is nothing to prevent the acceptance of the estate. Nevertheless, before accepting the estate, you should think about what you want to happen to the property in the future.

2. The future of the real estate

Once the inheritance is accepted, you have different options depending on whether you are the sole heir or a co-heir.

2.1. Possibilities for sole heirs

As sole heir you have the greatest freedom of action. You can use, rent or sell the property yourself.

2.1.1. Use the real estate yourself

If you want to use the property yourself, the decision depends on whether you are financially able to continue paying the mortgage. If you are not in a position to do so, you must consider renting or selling the property.

2.1.2. Rent the real estate

If you do not want to or cannot use the property yourself, renting it out is a popular alternative. Whether this is a good idea depends on two factors: Are there potential tenants for the property and if so, does it make financial sense?

If the property is expected to be vacant because it takes several months to find a tenant, you need to somehow cover the running costs.

Rental income is additional income and must also be taxed. Tax advice is essential in any case. You can suddenly find yourself in a new tax bracket, pension or health insurance contributions change or you lose entitlement to other benefits, if you are not careful.

The obligations as a landlord are also often overlooked. Regular renovations, insurance costs and suddenly changing legal regulations (rent control, fire protection etc.) are all factors that could make a lucrative letting of the property impossible.

As a rule of thumb, the newer the property, the sooner it can be sold quickly and easily.

2.1.3. Sell the real estate

If personal use and renting out are out of the question, the only option is to sell the property. The sale of a property depends mainly on whether there is a market for the property and whether the period until the sale can be financed. On average, a sale takes between six and twelve months. It must be possible to cover the running costs for that period of time.

Depending on the value of the property, it can make sense to pay the costs with a loan, which is then repaid after the sale.

2.2. Possibilities for a community of heirs

If the heirs are a community of heirs who do not wish to share the property, there are only two possibilities: The payoff or the sale.

2.2.1. Payout the other heirs

The heir who wants to keep the property pays out the shares of other heirs based on the appraised value of the property.

Example: In the case of two heirs with equal rights and a property value of 200,000€, one heir would pay the other 100,000€.

A payment does not have to be made immediately, but can also be arranged in installments or for a time in the future. Unfortunately, verbal agreements can lead to disputes, so they should always be set in writing.

2.2.2. Sell the real estate

If no heir wants to pay off the other heirs, the only remaining option is to sell the property. Experience shows that this is the easiest way to avoid disputes. The proceeds of the sale are then divided proportionally among the heirs.

2.2.3. The community of heirs can't make a decision?

If the heirs do not agree among on what is to happen to the property, the only remaining option is a divisional auction. This should definitely be avoided!

This not only causes trouble among each other, but in most cases also becomes really expensive. Because in an auction the sales proceeds are usually much lower than those of a sale on the free property market.

If the fronts are hardened, an estate agent can often help as a neutral contact person.

3. Conclusion: Inheriting real estate in Germany. Now what?

The first thing you need to pay attention to are the deadlines for accepting or rejecting the inheritance. Check the estate thoroughly to determine the exact value. If the inheritance is not indebted and you are able to pay the inheritance tax and the certificate of inheritance, there is basically nothing to prevent you from accepting the inheritance.