There are numerous advantages to be gained if you consider early on when and in what form you wish to transfer your rental properties to your children.
Each parent may gift up to 400,000 EUR to each child free of gift tax (Schenkungsteuer) - once every 10 years.
Example:
If both parents hold assets and have 2 children, they may transfer up to 1,600,000 EUR to the next generation free of gift tax: the father gifts 400,000 EUR to each child and the mother likewise gifts 400,000 EUR to each child. The same is possible again after a further 10 years.
The transfer can be optimised further:
You transfer the rental property whilst simultaneously retaining a usufruct (Vorbehaltsnießbrauch). This means the property already belongs to your child, but you continue to receive the rental income. You also bear all associated costs. For income tax purposes you continue to declare rental and leasing income and deduct all related expenses as before. On the one hand, the rental income remains available to you for your living expenses. On the other hand, you may be in a lower marginal tax bracket than your child, so that the overall tax burden across the family is optimised.
For gift tax purposes the property is valued in accordance with the Valuation Act (Bewertungsgesetz), but this value is reduced in your favour by the value of the usufruct. The value of the usufruct is calculated from the annual surplus from the letting and your statistical life expectancy.
Example:
Value of the property under the Bewertungsgesetz: 600,000 EUR
Donor: 65 years old, male
Annual surplus from letting: 24,000 EUR
Value of the usufruct: 9.019 x 24,000 = 216,456
Value of the gift:
Property: 600,000 EUR
Usufruct: -216,456 EUR
Value of the gift: 383,544 EUR
Gift tax: 0 EUR
In this case you save gift tax of 22,000 EUR by retaining the usufruct.
Early planning is therefore well worthwhile.