A 19-year-old real estate agent?

A. purchased a property in 2007 as a 19-year-old, which he financed without his own funds through a loan from his mother (Fr. 250'000.-) and a mortgage of (Fr. 670'000.-). Furthermore, a largely debt-financed conversion of the attic flat was carried out, which was based on A.'s own needs.

A. used the attic apartment for residential purposes and he rented out the rest of the building. A. sold the property in 2012. With a view to the sale as of 1 June 2012, the Land divided into condominium ownership units. In the same year, A. acquired a new property. During this period A. was a limited partner in a company run by his father Limited partnership, which is active in real estate trading.

In connection with the sale of the property, the tax authorities and the Tax Appeal Commission Basel-Stadt A. qualified as a commercial property agent. Consequently, the capital gains from business assets, i.e. from real estate, are taxable as income from self-employment in accordance with Art. 18 DBG [Federal Direct Tax Act]. A. appealed at last instance to Federal Supreme Court. The Federal Supreme Court rejected the complaint in the decision of 11 June 2019 with the following considerations.

BGer 2C_551/2018 of 11 June 2019

Term of the commercial real estate agent

According to the practice of the Federal Supreme Court, the distinction between self-employment and private asset management has to be determined on a case-by-case basis on the basis of a comprehensive assessment of the factual circumstances. However, the individual aspects are not considered in isolation. A commercial real estate agent is defined as a person who purchases and sells property systematically and with the intention of making a profit. Indicators for the existence of commerciality are the systematic approach, the frequency of real estate transactions, the close connection with the professional activity, the use of special expertise, the use of substantial external funds for financing or reinvestment of the profits made.

Argument 1: private retirement capital accumulation

In the appeal proceedings, A. submitted that the property had been acquired for the purpose of building up private pension assets and long-term self-residence. The intention is supported by the fact that the conversion of the penthouse was for personal needs and not at all intended to optimise the living space in order to maximise profits in view of an intended sale was made. The sale had never been an issue until 2012.

This argumentation rejects the Federal Supreme Court. A 19-year-old cannot blanketly conceal his professional status from the aspect of long-term asset accumulation. Furthermore real estate trading is characterised by its long-term nature and is by no means a day-to-day business. Furthermore, temporary selfinhabitation is not unusual for a property agent.

Argument 2: lack of specific expertise

A. further submits that he did not have any particular expertise at the time of acquisition. In the years between 2007 and 2012 he did not work in the limited partnership his father. It was untenable that the knowledge of his father should be credited to him.

In this context, especially the aspect of the acquisition of real estate without equity capital by a 19-year-old, this does Federal Supreme Court not require any special proof of a specific activity in the limited partnership of the father or professional advice from the father. On the other hand, it would be unworldly to assume a lack of expertise and lack of networking in real estate trading in the concrete constellation.

Argument 3: Lack of willingness to take risks

A. further argues that it is not tenable that a particular willingness to take risks is inferred from the fact that the acquisition is purely leveraged.

The Federal Supreme Court clarifies that due to the personal situation of the complainant at the time of the acquisition, being 19 years old and at the beginning of his studies, the pure debt financing goes far beyond what can be described as usual with regard to the risk-bearing capacity.

Decision Federal Supreme Court

Due to the external financing, the existing expertise, the planned procedure and the reinvestment of a substantial part of the profit in a new property, the Federal Supreme Court concluded that the qualification as a professional real estate agent by the tax authorities is convincing in the end.

Interestingly, the Federal Supreme Court also indicates that an assessment of periodic taxes is only valid for the period in question. Consequently, in the event of a subsequent assessment, the factual and legal circumstances will be assessed fundamentally differently.

Final remark

The decision is a good illustration of the Federal Supreme Court's practice with regard to the distinction between private asset management and self-employment, according to which it has to take into account the all circumstances of the individual case. This case-by-case consideration explains the present decision. There is no typical case of a commercial real estate agent, nevertheless the 19-year-old taxpayer qualifies as a "commercial real estate agent". However, it is important in each case that the personal circumstances at the time of acquisition are decisive are.