Administrative High Court: Real estate income tax exemption for exchanges resulting in the better layout of building land

Overview

In the present case, the Administrative High Court dealt with the question under which conditions a private land exchange is exempt from taxation with real estate income tax . In general, an exchange of land triggers a sale process which is then taxed with real estate income tax. The sale proceeds are the fair value of the property. However, the Income Tax Act contains an exemption where the exchange of land is exempted from this taxation if it is part of official measures to improve the layout of building land. Changes in ownership and of property lines are examples for measures to make areas that were previously unsuitable for building ready for construction.

Facts

Two adjacent plots of land of the complainant were located on an area that was rededicated to be building land and residential area by resolution of the municipal council. To make a planned access road possible, the complainant had to cede a part of his land to the municipality. The size of the remaining plots of land was no longer suitable for development due to its narrowness. Therefore, the complainant concluded an exchange agreement with the owners of the adjacent properties. He granted them the ownership of his remaining land in exchange for ownership of two other properties. The exchanged properties were of equal value, which is why no compensation payments were made. The complainant did not pay real estate income tax for the exchange transaction because in his opinion the tax exemption in Sec 30 Par 2 (4) of the Income Tax Act applied.

The tax office however assessed the exchange as a taxable sale of land reasoning that the exchange had not taken place within the framework of a building land allocation procedure that is necessary for the exemption.

Decision of the Administrative High Court

The Administrative High Court stated in the decision dated 19 March 2021, Ro 2019/13/0022, that exchange transactions of land within the framework of official measures to improve the layout of building land are exempt from taxation. This is particularly the case if the official measures are carried out in accordance with regulations applicable to improve the layout of building land (eg provisions of regional planning laws or building regulations). However, the exemption is not only limited to these transactions, as the Tax Amendment Act of 2012 (“AbgÄG 2012”) introduced an extension to comparable transactions. This takes into account that not all states had corresponding regulations. Regardless of the existence of such regulations, it should still be possible to create useful areas to build on through private exchange agreements. It is therefore not necessary that official measures follow regulations to improve the layout of building land. However, a prerequisite for such comparable measures is that public interest exists, or the official measure can be documented.

In the present case, land was exchanged because of official measures taken by the municipality. These measures, a rededication and an assignment of parts of the properties, have contributed to improve the layout of building land, as they have made new building land accessible through a road. The measures were also documented sufficiently. Because of the assignment, the land of the complainant was unsuitable for development and as a result the exchange transaction was concluded. Therefore, the exchange was triggered by the official measures and the exemption provision can be invoked.

Result

A private exchange of land is not only exempt from real estate income tax if it happens as part of an official building land allocation procedure. According to the Administrative High Court, the requirement for the exemption is that the exchange process is set in motion by official measures and that sufficient documentation is available.