Three-property limit for en bloc property sales

If more than three properties are sold within approximately five years (“three-property limit”), case law assumes that this constitutes commercial real estate trading. In such cases, the so-called extended reduction of trade income pursuant to Section 9 (1) sentence 2 of the Trade Tax Act (GewStG) does not apply. According to this provision, income resulting from pure asset management is not subject to trade tax, whereby proceeds from the sale of previously managed properties also benefit from this exemption.

In its decision of June 3, 2025 (case no. III R 12/22), the Federal Fiscal Court (BFH) once again had to decide on the criteria to be used to determine whether a company that is commercial solely by virtue of its legal form is engaged in commercial real estate trading and whether the sustainability of the activity plays a relevant role in this regard. A limited liability company (GmbH) sold five properties it had acquired just over two years earlier in a single notarized contract. It then applied for an extended reduction in its trade tax return. The tax office did not grant this because the GmbH had engaged in commercial real estate trading. The fiscal court agreed with the tax office's opinion.

As part of the appeal proceedings, the BFH initially confirmed its previous ruling. According to this ruling, the extended reduction requires that the management and use of one's own real estate does not exceed the scope of mere asset management; in this context, the acquisition of real estate merely represents the beginning and the subsequent sale the end of an activity that is fundamentally aimed at deriving income. On the other hand, an activity is considered to be primarily commercial if the exploitation of the real estate through restructuring (as in this case through acquisition and sale) takes precedence over its use for the purpose of generating income (e.g., through renting).

The point of contention in the dispute was whether commercial real estate trading also requires a corporation to engage in sustainable activity within the meaning of income tax law. In the opinion of the BFH, however, the criterion of the sustainability of the activity – as in the case of an primarily commercial partnership – or the number of purchasers is not relevant. This is because the BFH assumes that even a one-off en bloc sale of real estate can exceed the scope of the mere management and use of one's own real estate and thus be detrimental to the extended reduction.

If properties are resold shortly after acquisition, this indicates that the acquisition was made with the intention of resale and not for long-term rental. The fact that the limited liability company sold all properties in a single transaction does not refute the indication of an initial intention to resell. Long-term financing with a loan also did not allow for any other conclusion, as the early repayment penalty was significantly lower than the foreseeable increase in value.

Accordingly, the Federal Fiscal Court ruled that even an en bloc sale of five properties to a single purchaser in the third year after acquisition is of a commercial nature. This established that the transaction constituted harmful commercial real estate trading, and the extended reduction was denied.

The simple reduction to which the plaintiff was entitled in principle under substantive law (Section 9 No. 1 sentence 1 GewStG) was ruled out in the appeal judgment on the basis of procedural provisions; the plaintiff had failed to submit the necessary documents despite being requested to do so, thereby violating its obligations to cooperate.


 

Notice: 

The decision clearly identifies mere asset management as the decisive criterion for granting the extended reduction; consequently, the three-property limit must be observed in the event of any property sales. However, the specific circumstances of each individual case must always be taken into account, as demonstrated by the decision of the BFH of March 20, 2025 (Ref. III R 14/23), which we reported on in our Insight of May 23, 2025. Despite the sale of thirteen properties in one year, commercial real estate trading was denied. The special feature in this case, however, was that the sales were solely attributable to the unforeseeable death of one of the two managing partners at the age of only 55.