A 19-year-old real estate dealer - Is that possible?

In June 2019, the Federal Court had to decide whether a 19-year-old qualifies as a professional real estate trader. Learn in the article how the Federal Court decided.

The 19-year-old A. acquired a property in 2007, which he financed with a loan from his mother amounting to 250,000 CHF and a mortgage worth 670,000 CHF. Additionally, A. carried out a largely externally financed renovation of the attic apartment, so that he could subsequently live in it himself. The other residential units of the building were rented out. Said building was sold in 2012, after which A. acquired another property in the same year. At the same time, A. was also a limited partner in the limited partnership run by his father, which was active in real estate trading.

The tax authorities of Basel-Stadt qualified A. as a professional real estate trader. Consequently, A. was obliged to tax the capital gains from the sale of the property as income from self-employed activity. A. appealed against this assessment up to the Federal Court. The case was judged in the ruling BGer 2C_551/2018 of June 11, 2019.

Professional Real Estate Trader

A professional real estate trader is defined as one who systematically undertakes the purchase and sale of real estate with the intention of making a profit. Indicators of professional trading include a systematic approach, a series of transactions, a close connection with professional activity, specialized expertise, significant use of external financing, or the reinvestment of profits gained. An assessment must consider all criteria and judge each case on its own merits.

Private Wealth Accumulation

In the case described above, A. argued that the acquisition of the property was merely for private retirement planning, as indicated by the renovation and use of the attic apartment. A sale had never been intended before 2012. The Federal Court dismissed this argument with the reasoning that professional trading cannot be disguised under the aspect of wealth accumulation. Moreover, it is not uncommon for real estate traders to inhabit a property themselves.

Expertise

Furthermore, A. asserted that he lacked expertise in the field of real estate trading, especially since he had not been active in his father's company during the years 2007 – 2012. It was argued that A.'s father's knowledge should not be attributed to him. The Federal Court also dismissed this argument. It argued, considering the property acquisition was made without own capital, no special proof of activity in the father's company was required. The Federal Court further stated that it would be naïve to assume that A. did not benefit from his father's expertise and contacts.

Willingness to Take Risks

A. also criticized that mere reliance on external financing was an indication of special risk-taking. However, the Federal Court noted that in view of A.'s personal situation (19 years old, studying), the sheer external financing went far beyond what might be called normal risk capacity.

In light of the external financing, existing expertise, systematic approach, and reinvestment of the sale proceeds into a new property, the Federal Court concludes that qualifying A. as a professional real estate trader is lawful.

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