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Commercial trading in property when constructing an extension building

Extensive building and extension measures that a taxpayer carries out on a property that has been privately let for many years when the sale of the property is imminent could result in the property being assigned to commercial business assets.

The limits of non-taxable asset management are normally exceeded when more than three properties are sold again within a period of approximately five years following their purchase or construction. Even though, at first sight, the basic requirement for commercial trading in property – the sale of more than three properties within five years – has not been fulfilled, nevertheless, under certain circumstances, commercial trading in property may exist.

With respect to this issue, the Federal Fiscal Court, in its ruling from 15.1.2020 (case reference: X R 18, 19/18) decided that commercial trading in property can exist in the case of properties that have been privately let if, in view of a sale, the taxpayer carries out construction measures that are so extensive that the existing building is not merely extended or considerably enhanced beyond its previous condition but, instead, a new asset is produced – a building. In such a case, it would not be relevant if the measures gave rise to a standalone building beside the existing one, a standalone part of the building or a single new building.

Please note: The very important consequence is that, in such a case, there will be not just one property that is included in the sale but, instead, (at least) two properties will be sold and these would have to be factored into the 3-property limit.

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