Payment for Giving Up a Usufruct: Taxable Since the New BFH Ruling, with a Short Transition Window

Published on 24.10.2026

Usufruct Buyout: Taxable After BFH Ruling

Anyone who reserved a usufruct (Nießbrauch) when transferring a property and later has it bought out against a settlement payment (Abfindung) could, as a rule, receive that payment tax-free until now. This no longer applies if the usufructuary lets the property: the Federal Fiscal Court (Bundesfinanzhof, BFH) now treats the payment as taxable compensation. However, the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) grants a transition period in its letter of 21 October 2026. Anyone who intends to buy out a usufruct should therefore check now whether the window can still be used (as of 23 October 2026).

How the reserved usufruct (Vorbehaltsnießbrauch) works in principle in a lifetime transfer is explained in our overview Lifetime asset transfer instead of a will.

What the BFH has decided

In its judgment of 10 October 2025 (IX R 4/24), the BFH held that a payment for waiving a usufruct over real property held as private assets is taxable compensation (Entschädigung) under Section 24 no. 1(a) EStG (in conjunction with Section 21(1) sentence 1 no. 1 EStG, German Income Tax Act) if the usufructuary actually lets the property at the time of the waiver and earns income from letting and leasing (Einkünfte aus Vermietung und Verpachtung) from it.[1][9]

The reasoning is economic: if the usufructuary uses the right to let the property, the settlement replaces the rental income that would have continued to flow without the waiver. Detached from the letting, the usufruct “as such has no independent value” (para. 24, our translation).

With this, the BFH abandons its case law from 1992 (X R 34/89); the X Senate has stated that it no longer adheres to it. Until now, the buyout of a usufruct was regarded as a non-taxable reallocation of assets, and this is still how the tax administration’s usufruct decree (Nießbrauchserlass) of 2013 puts it.[1][4] In addition, a situation of compulsion or pressure is no longer a precondition for taxability; it only matters for the question of whether the reduced tax rate for extraordinary income (Section 34 EStG) applies. The specific case will now be decided again by the Münster Finance Court (Finanzgericht Münster), to which the BFH referred the matter back.

The BMF transition rule: a window

The BMF responded to the judgment on 21 October 2026. Following coordination with the federal states, the following applies:

“(…) the previous case law (…) continues to apply to contractually agreed usufruct buyouts until the end of the day on which the decision is published in the BStBl.” (our translation)[2]

In practice, this means: anyone who contractually agrees on the buyout before the judgment is published in the Federal Tax Gazette (Bundessteuerblatt, BStBl) can still rely on the old, favourable legal position. When publication will take place had not yet been determined on 23 October 2026. The window may therefore close at short notice.

Who is affected and who is not?

• The usufructuary lets the property and is paid for the waiver: In future, the settlement is to be taxed as compensation for lost rental income. Whether the reduced tax rate under Section 34 EStG applies to a one-off payment depends on the circumstances of the individual case.
• The usufructuary lives in the property personally: The BFH expressly left this case open (para. 25). Because no rental income is replaced here, there is much to suggest that the settlement remains non-taxable; this is not certain.
• Waiver without consideration: No money flows, so no income tax arises for the usufructuary. For the owner, however, gift tax (Schenkungsteuer) may need to be examined.
• Settlement in instalments or as an annuity: The judgment says nothing about this. It is to be expected that each payment will then be taxable in the year of receipt; the reduced tax rate is unlikely to apply to payments spread over several years.

Planning ideas: how useful are they?

Usufruct over the sale proceeds instead of a settlement (substitute usufruct, Surrogatnießbrauch). If the property is sold, it can be agreed that the usufruct continues over the sale proceeds or over a replacement property instead of paying off the usufructuary. The BFH recognises this if the usufruct continues “without interruption” over the proceeds and this has been agreed in a binding manner beforehand and is also implemented (BFH, judgment of 24 May 2022, IX R 1/21).[3] This helps if the usufructuary is to keep the income permanently. As a way of nevertheless receiving a tax-free settlement later, it is of only limited use: if the replacement property is let again and the usufruct is then bought out, the new case law applies once more.

Usufruct held in a GmbH, sale of the GmbH shares. It is occasionally recommended to grant the usufruct to a GmbH and later sell the shares instead of the usufruct. This is rather not advisable: at the level of the GmbH, corporate income tax and possibly trade tax arise on an ongoing basis, distributions are taxed a second time, and the sale of shares is also taxable. Moreover, with its statement that the usufruct has no independent value without the letting, the BFH gives the tax office an argument for treating the arrangement as an abuse of legal structuring options (Section 42 AO, German Fiscal Code).[10] How arrangements using corporations are generally to be assessed for real estate holdings is covered in the article The real estate GmbH as a supposedly clever tax-saving idea.

Practical tip

Anyone who is planning to buy out a usufruct in any case should agree on it contractually now and document the conclusion of the contract in a verifiable way before the judgment appears in the Federal Tax Gazette. Whether the conclusion of the contract or the payment is decisive has not been conclusively clarified; the wording of the BMF letter (“contractually agreed”, in German “vertraglich vereinbarte”) points to the conclusion of the contract. Anyone who only wants to buy out later, by contrast, should check whether the letting ends before the waiver, whether a one-off payment at the reduced tax rate is more favourable than instalments, and whether a usufruct over the sale proceeds is the better solution.

Where the tax treatment of a buyout that has not yet been implemented is open, for example in the case of a self-occupied flat or payment in instalments, a binding ruling (verbindliche Auskunft, Section 89(2) AO) from the tax office can bind the tax office for the specific planned contract before it is concluded.[11] However, the tax office may refuse to issue the ruling if clarification by the BFH or the BMF is foreseeable. The ruling is subject to a fee (Section 89(3) to (7) AO), takes time and does not extend the window of the transition rule.

Variant: right of residence instead of usufruct

When transferring the house, parents frequently do not reserve a usufruct but only a right of residence (Wohnrecht). If this right of residence is later given up against a settlement, for example when moving into a care home or when the house is sold, the same question arises.

Legal position (fact): A right of residence registered as a real right (dingliches Wohnungsrecht, Section 1093 BGB, German Civil Code) entitles the holder to live in the flat personally, together with family and carers. The holder may only leave the flat to others, that is let it, if this is permitted (Section 1092(1) sentence 2 BGB).[5] The tax administration applies the principles on usufruct accordingly to the buyout of a registered right of residence (usufruct decree, margin no. 66). In 1990, the BFH had decided that a payment for waiving a right of residence is not taxable (judgment of 9 August 1990, X R 140/88). The new judgment names this decision as part of the previous line of case law, but expressly abandons only the usufruct decision of 1992; it leaves open the case in which the property is not let by the holder at the time of the waiver (para. 25).[1][4]

Classification (assessment):

• The holder lives in the flat personally: The settlement does not replace any rental income. The BFH’s reasoning that the payment takes the place of lost rent does not hold here. The settlement should therefore remain non-taxable.
• The holder has let the flat with the owner’s permission: The case is then the same as with a let usufruct; under the new case law, the settlement is to be taxed as compensation.
• For the owner, the settlement is as a rule subsequent acquisition costs of the building (margin nos. 57, 59, 66 of the usufruct decree). If the owner subsequently lets the vacated flat, the payment can be claimed through depreciation; in the event of a later sale within the speculation period under Section 23 EStG, it reduces the gain.

Tip for the right of residence variant: As long as the holder lives in the flat personally, the buyout is considerably less problematic for tax purposes than with a let usufruct. Before the holder of the right of residence lets the flat, it should therefore be considered carefully whether a buyout is likely later: buying out first and letting afterwards (then by the owner) is more favourable for tax purposes than the other way round. If the flat is already let, the window until publication of the judgment in the Federal Tax Gazette applies here too. And anyone planning a transfer with a reserved right today should choose deliberately: the right of residence fits if the parents want to live in the property themselves; the usufruct fits if they need rental income, with the new tax consequence in the event of a later buyout.

If the owner permits letting or the right of residence is converted into a usufruct

Example: The father has given the house to his son and reserved a right of residence. Later he moves out, and the son permits him to let the flat, or both convert the right of residence into a usufruct. This has three consequences.

Gift tax, this time in the opposite direction. If the son extends the father’s right without consideration, this may constitute a gift from the son to the father (Section 7(1) no. 1 ErbStG, German Inheritance and Gift Tax Act). For gifts from their children, parents only fall into tax class II (Steuerklasse II; Section 15(1) ErbStG; tax class I applies to them only for acquisitions upon death). The tax-free allowance is therefore only 20,000 euros (Section 16(1) no. 5 ErbStG), and the tax rate starts at 15 % (Section 19(1) ErbStG). The enrichment is valued at its capitalised value: the annual value of the additional use multiplied by the multiplier based on the father’s age (Section 14(1) BewG, German Valuation Act); the annual value is capped at the tax value of the property divided by 18.6 (Section 16 BewG).[6][7]

Classification (assessment): How large the enrichment is depends on the extent of the extension. The right of residence itself is already valued at the customary local rental value of the flat (Section 15(2) BewG); if the son only permits the letting of the same flat, the annual value often hardly increases. If, on the other hand, the new usufruct covers further flats or the whole house, the additional capitalised value quickly exceeds 20,000 euros. Sample calculation with assumed figures: additional annual value 6,000 euros, multiplier 10, capitalised value 60,000 euros, less the allowance of 20,000 euros, taxable 40,000 euros, tax at 15 % = 6,000 euros.

Income tax for the father. If the father lets the flat, he himself earns income from letting and leasing, even though the house no longer belongs to him. For tax purposes, what counts here is not who owns the house but who lets it: whoever collects the rent pays tax on it and may deduct the costs. The tax administration treats the reserved right of residence like a reserved usufruct in this respect (usufruct decree, margin nos. 41, 49). For the father, this means: only from the start of the letting, and not while he is still living there himself (that is a private matter), may he, although he is no longer the owner, claim depreciation on the building in the same way as he could previously as owner (margin no. 42). In addition, he can deduct as income-related expenses (Werbungskosten) the costs that he has to bear under the transfer agreement or, if this contains no provision, under the statutory allocation of charges, and that he actually pays (margin nos. 43, 21). The son as owner has no rental income during this period and therefore cannot deduct anything (margin no. 45). This applies to the mere permission to let. If, on the other hand, the right of residence is converted into a new usufruct, the tax administration will probably no longer treat it as a reserved usufruct, because this requires the right to be created at the same time as the transfer (margin no. 39). A usufruct created later without consideration is a granted usufruct (Zuwendungsnießbrauch); the father may then not deduct depreciation on the building itself (margin no. 19). The tax administration even treats a replacement usufruct granted in place of a previous usufruct as a newly created gratuitous granted usufruct (margin no. 61, last sentence).[4] If such a granted usufruct is later bought out against a settlement, the tax administration has so far treated the payment as a private gratuitous transfer (margin no. 61); whether it is to be taxed as compensation under the new BFH judgment if the flat is let at the time of the waiver is open. The judgment concerns the buyout of a usufruct over a let property; it does not expressly address the buyout of a gratuitously granted usufruct between relatives.[1]

Is a notary needed? Not always.

• The son can grant the father permission to let (Section 1092(1) sentence 2 BGB) without any particular form; the law does not prescribe one. However, it then only binds the son and his heirs, and not automatically a later buyer of the house (assessment). If only because of the tax office, it should be recorded in writing.
• If the permission is to become part of the registered right of residence or the right of residence is to be converted into a usufruct, this is an amendment or new creation of a right in land: it requires agreement and registration in the land register (Sections 873, 877 BGB). The land registry requires a consent to registration (Bewilligung) in publicly certified form for this (Section 29 GBO, German Land Register Code), that is the notary, but only for the certification of the signature, not for a notarial recording.[8]
• A promise of a gift would have to be notarially recorded; however, the defect of form is cured by performance (Section 518 BGB). A permission that is implemented immediately is therefore also effective without a notary (assessment).

Tip: Before the owner permits letting or converts the right of residence into a usufruct, estimate the capitalised value of the extension. If it exceeds 20,000 euros, examine alternatives: the son lets the flat himself; any gratuitous transfer would then at most run from the father to the son, with an allowance of 400,000 euros instead of 20,000 euros. Or the father gives up the right of residence against a settlement while he is still using the flat himself and has not let it; the settlement then does not replace any rental income and, under the previous line, is not taxable (margin no. 58 of the usufruct decree; the BFH left the case of owner-occupation open). And record the permission in writing; for registration in the land register, a notarially certified consent to registration is sufficient.

Cross-check: when does no gift tax arise?

Rule of thumb: gift tax or income tax. A transaction is either gratuitous or for consideration. If it is gratuitous, gift tax may arise for the beneficiary, but no income tax on the gratuitous transfer itself. If it is for consideration, no gift tax arises insofar as performance and consideration are of equal value; the law only taxes “insofar as the recipient (…) is enriched” (Section 7(1) no. 1 ErbStG, our translation). Instead, income tax may arise for the recipient of the money. Both taxes at the same time only arise for different transactions: the gifted permission may trigger gift tax, the subsequent rent income tax.

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In economic terms, the mere waiver looks like the original gift, only larger: the son now has the house without encumbrance, that is what he would have received from the outset without the reservation. If the waiver takes place within ten years of the transfer, both gifts are aggregated (Section 14(1) ErbStG); the allowance of 400,000 euros is available only once for both together.[6] How the allowances can be used in a ten-year rhythm is shown in the article Anticipated succession: gift allowances can be used more than once; when the tax office attributes gifts made via intermediaries to the actual donor is covered in the article on chain gifts (Kettenschenkung). The right given up is valued at its capitalised value at the time of the waiver; the older the father, the lower the value.

Result of the cross-check (assessment): Gifts from parents to a child benefit from an allowance of 400,000 euros per parent, gifts from the child to the parents only from 20,000 euros. Arrangements should therefore be structured so that the enrichment arises for the child and not for the parents: it is better for the father to waive or for the son to let the property himself than for the son to grant the father additional rights after the fact.

Conclusion: buying out a usufruct after the BFH ruling

1. Let usufruct: Under BFH IX R 4/24, the settlement is taxable compensation. For buyouts contractually agreed by the time the judgment is published in the Federal Tax Gazette, the old legal position still applies according to the BMF letter of 21 October 2026.
2. Self-occupied flat: The BFH left this case open. There is much to suggest that the settlement remains non-taxable.
3. Right of residence: Same line; buying out first and letting afterwards is more favourable for tax purposes than the other way round.
4. Extension in favour of the parents: A gifted permission to let or a conversion into a usufruct can trigger gift tax with an allowance of only 20,000 euros. Arrangements should be structured so that the child is enriched.

Frequently asked questions

Is a settlement for waiving a usufruct taxable?

Yes, if the usufructuary personally lets the property at the time of the waiver. The BFH then regards the settlement as compensation for lost rental income (Section 24 no. 1(a) EStG). Whether the reduced tax rate under Section 34 EStG applies depends on the individual case.

Until when does the old legal position still apply?

According to the BMF letter of 21 October 2026, for usufruct buyouts contractually agreed by the end of the day on which the judgment is published in the Federal Tax Gazette. The date had not yet been determined on 23 October 2026.

Does this also apply if I live in the flat myself?

The BFH expressly left this open. Because the settlement then does not replace any rental income, there is much to suggest that it remains non-taxable. This is not certain.

Does the judgment also apply to a right of residence?

The tax administration applies the usufruct principles accordingly to the registered right of residence. If the holder has let the flat with the owner’s permission, the settlement is likely to be taxable under the new case law; if the holder lives there personally, it should remain non-taxable.

Is a notary needed to convert a right of residence into a usufruct?

For registration in the land register, yes, but only for the public certification of the consent to registration (Section 29 GBO), not for a notarial recording. A mere permission to let does not require any particular form but should be recorded in writing.

Attorney Dr. Johannes Fiala and the law firm, which focuses on international inheritance law, tax law and asset protection in Munich, advise parents, children and property owners on the transfer of real estate with reserved rights, from structuring usufructs and rights of residence through their buyout to the gift tax and income tax consequences. Dr. Fiala has published extensively on emigration and asset protection. Feel free to contact the firm without obligation to discuss your individual situation in an initial consultation. This article does not replace advice in the individual case.

Sources

Each accessed on 23 October 2026.

1. BFH, judgment of 10 October 2025, IX R 4/24 (headnotes 1 and 2, paras. 19 to 25, 31 to 43), https://www.bundesfinanzhof.de/de/entscheidung/entscheidungen-online/detail/pdf/STRE202520349?type=1646225765
2. BMF letter of 21 October 2026, IV C 1 – S 2253/00047/032/015, https://www.bundesfinanzministerium.de/Content/DE/Downloads/BMF_Schreiben/Steuerarten/Einkommensteuer/2026-10-21-entgeltlicher-verzicht-niessbrauch.html
3. BFH, judgment of 24 May 2022, IX R 1/21 (substitute usufruct), https://www.bundesfinanzhof.de/de/entscheidung/entscheidungen-online/detail/pdf/STRE202210215?type=1646225765
4. BMF letter of 30 September 2013 (usufruct decree, Nießbrauchserlass), BStBl I 2013, 1184, margin nos. 19, 21, 39, 41 to 45, 49, 57 to 61, 64 to 66; BFH, judgments of 9 August 1990, X R 140/88, BStBl II 1990, 1026 (waiver of a right of residence), and of 25 November 1992, X R 34/89, BStBl II 1996, 663; BFH, judgments of 20 September 2024, IX R 5/24, and of 11 February 2025, IX R 14/24 (usufruct over GmbH shares).
5. Sections 1092, 1093 BGB, https://www.gesetze-im-internet.de/bgb/__1093.html
6. Sections 7, 14, 15, 16, 19 ErbStG, https://www.gesetze-im-internet.de/erbstg_1974/
7. Sections 14 to 16 BewG, https://www.gesetze-im-internet.de/bewg/
8. Sections 518, 873, 877 BGB; Section 29 GBO, https://www.gesetze-im-internet.de/gbo/__29.html
9. Section 24 no. 1(a), Section 21(1) sentence 1 no. 1, Section 34(1) and (2) no. 2 EStG, https://www.gesetze-im-internet.de/estg/
10. Section 42 AO, https://www.gesetze-im-internet.de/ao_1977/__42.html
11. Section 89(2) to (7) AO, https://www.gesetze-im-internet.de/ao_1977/__89.html; Application Decree to the Fiscal Code (Anwendungserlass zur AO, AEAO) on Section 89, no. 3.5.4 (refusal, among other cases, where a decision of the highest court or an administrative instruction is to be expected in the foreseeable future)