If the parent-purchase property is sold on the open market, any increase in value will generally be taxable income for the parents, provided they have not resided in the property. However, the child, who already resides in the parent-purchase property, may, in many cases, continue living there after a possible transfer. This allows the child to potentially avoid taxation on the increase in value they realise.
When transferring the property to the child, the transfer can be made either at market value or at a price within a range of plus or minus 15% of the public valuation. For example, if a property has an estimated value of DKK 2 million and a public valuation of DKK 1.2 million, it can be transferred either for DKK 2 million or for an amount between DKK 1,020,000 and DKK 1,380,000. This serves as the general starting point.
The choice of sale price is not inconsequential. For example, if the parents originally purchased the apartment for DKK 1.3 million, they may face taxation on a gain of DKK 700,000 (subject to adjustments under the Danish Property Gains Taxation Act) or opt to transfer the property to the child, who may later realise the gain tax-free.
In certain cases, parents may even undertake a family transfer at a tax loss. This loss can then be carried forward and offset against other taxable gains on real property, for example, if the parents own multiple apartments.
However, it is not always guaranteed that the property can be transferred at a low price or that the child can expect to avoid taxation on future gains.
It is essential that no external valuation from a real estate agent, known to the parties, exists at the time of the transaction, and that any financing obtained does not exceed the sale price. Furthermore, other siblings must not be compensated through gifts or wills in connection with the transfer. Several other factors may also come into play.
Case law has established that, as a general rule, the taxpayer is entitled to rely on the 15%-rule under the Valuation Circular (værdiansættelsescirkulæret), unless “special circumstances” apply. At present, it remains unsettled which additional circumstances may qualify as “special,” beyond those already mentioned above.
It is equally important to note that the child must acquire the property with the genuine intention of residing there. Otherwise, any capital gain realised by the child will be taxable in the same manner as that of the parents.
Consult PrivatRevision if you are considering a family transfer of a parental property purchase. Substantial advantages may be achieved through proper structuring. Conversely, seemingly minor errors may alter the outcome from tax-exempt to taxable.
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