Real Estate Sale with Installment Payments: When Deferral Qualifies as a Loan — and When It Does Not

Overview of the Schleswig-Holstein Fiscal Court Decision

In a recent ruling (Judgment of September 17, 2024 – 4 K 34/24), the Schleswig-Holstein Fiscal Court held that the deferral of a purchase price claim in connection with the sale of real property may generally be classified as a loan. This can result in taxable investment income — even in the absence of contractually agreed interest. In the specific case at hand, however, due to the special intra-family arrangement, the court determined that a gift was present. For both companies and private sellers, this distinction carries significant tax implications.

According to established case law of the Federal Fiscal Court (BFH), if a private owner sells real estate on an installment basis without charging interest, the transaction is nevertheless treated as a loan for tax purposes. The installments received must be split into principal and deemed interest (§ 12 (3) German Valuation Act – BewG), with the deemed interest qualifying as investment income (§ 20 (1) No. 7 German Income Tax Act – EStG).

In the present case, however, the installment arrangement was concluded within the family, and the interest benefit was explicitly intended as a gift. The court clarified that in such circumstances, the income tax consequences are superseded by the gift tax rules: the transaction is not treated as taxable investment income, but rather as a gift subject to gift tax (§ 7 (1) German Inheritance and Gift Tax Act – ErbStG).

Analysis: Implications for companies and private sellers

1. Draft installment agreements carefully: Particularly in sales to third parties, deemed investment income may arise — even without explicit interest clauses. Companies and private sellers should carefully review contract terms.
2. Consider tax implications in family transactions: Where installment payments are agreed within a family, clear documentation is needed if the interest benefit is intended as a gift. Otherwise, unintended taxable investment income may result.
3. Risks of unclear agreements: Missing or ambiguous provisions can lead to substantial tax burdens — either through income tax on deemed interest or through gift tax.

Practical recommendations

• Draft contracts precisely: Include clear statements regarding interest and, where relevant, the intent to treat the interest benefit as a gift.
• Simulate tax consequences: Before signing, assess both income tax and gift tax implications.
• Seek specialized advice: For intra-family real estate transfers in particular, professional tax and legal structuring is recommended.

Conclusion: The Schleswig-Holstein Fiscal Court clarified: An installment payment arrangement in a real estate sale can be treated as a loan for tax purposes, resulting in deemed investment income — unless the interest benefit is clearly structured as a gift within the family.