How do I apply for the capital gains tax allowance (section 16 (4) EStG)?

If you are aged 55 or over or are permanently unable to work, you can apply for a capital gains allowance. This is provided it is the first time since 1996 (§ 16 para. 4 EStG).

It may be the case that a portion of the capital gain is subject to tax at only 60% under the partial income procedure. This applies if the business assets sold included shares in corporations. This portion cannot additionally benefit from the capital gains allowance. Therefore, the portion that is 60% taxable must be deducted from the capital gain and entered in line 16.

(2023): How do I apply for the capital gains tax allowance (section 16 (4) EStG)?

How often can the capital gains allowance under Section 16 (4) EStG be claimed?

The tax allowance under § 16 (4) EStG is granted to each person once in a lifetime for a capital gain.

In addition to the allowance, you can also apply for the tax reduction under § 34 (3) EStG. The capital gain is then taxed at a reduced rate, which is 56% of the average tax rate (but at least 14%). The tax reduction under § 34 (3) EStG is also granted to each person once in a lifetime for a capital gain.

(2023): How often can the capital gains allowance under Section 16 (4) EStG be claimed?

How do I apply for the reduced tax rate (section 34 (3) EStG)?

If you are over the age of 55 or permanently unable to work, you benefit from a further tax reduction:

The capital gain can be taxed at a reduced rate on application, for the amount exceeding the tax allowance for capital gains. This is provided it is the first time since 2001. The reduced tax rate is 56% of the average tax rate, but at least the initial tax rate of 14% (§ 34 para. 3 EStG).

(2023): How do I apply for the reduced tax rate (section 34 (3) EStG)?

What is included in capital gains?

Income from self-employment also includes profit from the sale of a freelance practice, office or related assets, an independent part of the assets, or a share in the assets. The closure of a practice, office, etc. is also considered a sale (§ 18 para. 3 EStG). For tax purposes, the capital gain is treated according to special rules and must therefore be distinguished from the current profit.

Anyone who sells or closes their business or partnership share can take advantage of two important tax benefits:

• Capital gains allowance: The capital gain is tax-free up to 45,000 Euro. However, this amount is reduced if the capital gain exceeds 136,000 Euro, by the amount exceeding this. Therefore, the capital gains allowance is no longer available from a capital gain of 181,000 Euro (§ 16 para. 4 EStG).
• Reduced tax rate: The capital gain remaining after deduction of the allowance is eligible for the one-fifth rule. Upon request, it can also be taxed at a reduced rate, namely at 56% of the average tax rate and at least 14% (§ 34 para. 3 EStG).

The capital gains allowance and the reduced tax rate are only granted under certain conditions:

• You must be at least 55 years old or permanently occupationally disabled in the sense of social security law.
• You can only claim the benefits once in your lifetime: the capital gains allowance from 1996, the reduced tax rate from 2001.
• You must apply for the benefits.

If the business is sold before the age of 55, without being permanently occupationally disabled, only the one-fifth rule applies. However, this rule does not result in any tax savings if current income is already taxed at the top rate.

When selling a partnership share, you are also entitled to the full capital gains allowance, not just a proportionate amount. However, if you only sell a part of your partnership share, the capital gain is considered current income, and neither the capital gains allowance nor the reduced tax rate or the one-fifth rule apply (§ 18 para. 3 in conjunction with § 16 para. 1 sentence 2 EStG).

To prove permanent occupational disability, a notice from the pension insurance provider or a medical certificate is usually sufficient. This can also be done by a private insurance company if their conditions meet a certain threshold for occupational disability. However, it has been established that there are other ways to prove permanent occupational disability (BFH ruling of 14.12.2022, X R 10/21).

(2023): What is included in capital gains?