Drei-Objekt-Grenze: when letting becomes a property trade

Updated: 28 August 2026 · approx. 9 min read

A portfolio grows, part of it is sold again — and suddenly the assessment no longer says "letting and leasing" but "income from a trade or business". The trigger is almost always the same rule of thumb: the Drei-Objekt-Grenze, the three-object rule. It appears in no statute, yet it decides whether a sale after ten years stays tax-free or becomes fully taxable. This article shows where the rule comes from, what counts as an "object", what the reclassification actually costs — and where the Federal Fiscal Court (Bundesfinanzhof, BFH) has recently drawn its limits.

The three-object rule is not in any statute

Look for it in the German Income Tax Act and you will not find it. The statute knows only the general concept of a trade: under § 15 (2) sentence 1 EStG, an "independent, sustained activity undertaken with the intention of making a profit and constituting participation in general economic commerce" is a trade, provided it is not agriculture and forestry, a liberal profession or other independent work. An unwritten fourth element is added by the courts: the activity must exceed the scope of private asset management.

For exactly that dividing line, case law has developed a typifying rule. The BFH puts it in a standing formula: under the typifying three-object rule, a commercial property trade may be assumed where at least four objects are disposed of within a close temporal connection of as a rule five years, measured between acquisition or construction and the sale. So the rule is named after three, but it is the fourth object that matters.

What the rule is in legal terms. Not a statute and not an irrebuttable presumption, but prima facie evidence. The BFH expressly calls it an indicator that permits the inference of a conditional intention to sell "without further indicators being required", but that is not an irrebuttable presumption (order of 20 March 2025 – III R 14/23). The converse follows: the line can be crossed without four sales, if other circumstances point to a dealer.

What counts as an "object" — and what a single contract does not change

The most common misconception is that an apartment block is "one object" and therefore harmless. The concept is broader: according to the BFH, objects for the purposes of the three-object rule can be not only single- and two-family houses and condominium units, but also apartment blocks and commercial buildings. What matters is whether the unit can be sold on its own — not its size and not its value.

Bundling several properties into one contract does not help either. In 2025 the III. Senate held that five apartment-block properties sold in a single act of sale to a single buyer cross the three-object rule. Anyone who assumes a portfolio deal is "one transaction" is counting the wrong unit: objects are counted, not deeds and not buyers.

Situation	Objects counted	Why
Four condominium units, four contracts	four	Each unit can be sold on its own.
Four condominium units, one contract, one buyer	four	Bundling does not change the number of objects.
One apartment block sold as a whole	one	One property, one object — but a full one.
One apartment block, previously split into condominium units	as many as there are units	The split creates separately saleable objects.

The five-year period: an observation window, not a limitation period

The five years run per object, from acquisition or completion to the sale. They are not a deadline after which nothing can happen — they are the period in which the indicator bites. After that the evidential position shifts noticeably in the owner's favour: for disposals more than five years after acquisition, the BFH holds that "further indicators must be added in order to assume a commercial property trade from the outset" — and particularly so where the first sale of all happens only after that period.

Those further indicators are not theoretical. The BFH has assumed at least a conditional intention to sell as early as construction where a taxpayer familiar with the trade — the example given is an estate agent — sold fewer than four objects within five years of completion, but then sold further objects systematically and within a relatively short time afterwards. Anyone who works with property professionally is judged more strictly than a passive investor.

What this article deliberately does not claim. Advisers commonly cite a rule that letting a property for at least ten years before selling keeps the transaction within asset management regardless of the number of objects. That statement comes from an administrative circular whose official full text we could not access for this article. It is therefore not reproduced here as applicable law. What is documented is the weaker but practically parallel statement of the BFH above: after more than five years the tax office needs additional indicators.

What the reclassification actually costs

The most expensive item is not the trade tax but the loss of the exemption after the holding period. Privately held land is taxable under § 23 (1) sentence 1 no. 1 EStG only if "no more than ten years" lie between acquisition and disposal — after that the gain is tax-free. That provision, however, gives way: under § 23 (2) EStG, income from private disposal transactions is "to be allocated to income from other categories of income in so far as it belongs to them". If the property belongs to a commercial property trade, § 15 EStG applies — and it knows no holding period. How the ten-year rule works in the normal case is set out in our article on German capital gains tax on property.

Question	Private asset management	Commercial property trade
Sale more than ten years after purchase	tax-free	taxable
Category of income	Letting and leasing; on sale, other income	Trade or business
Trade tax	no	yes, § 2 (1) sentence 1 GewStG
Effect on earlier sales	—	The intention is assumed to have existed already at acquisition

The last row is the uncomfortable one. The BFH reasons that crossing the line indicates "the conditional intention to sell already present at the time of acquisition or the start of construction". The fourth sale therefore does not create a new state of affairs; it reveals an assumed old one — with the consequence that the three preceding sales are drawn into the same picture.

Worked example: trade tax on a disposal gain

Four condominium units, all bought in 2021, all sold in 2025, total gain €180,000. Trade tax arises under § 2 (1) sentence 1 GewStG because "every standing trade" is subject to it. For individuals, § 11 (1) sentence 3 no. 1 GewStG reduces the trade income — rounded down to a full €100 — by an allowance of €24,500; the tax base rate under § 11 (2) GewStG is 3.5%.

Item	Calculation	Amount
Trade income (simplified = gain)	Disposal gain	€180,000
less allowance	€180,000 − €24,500	€155,500
Tax base amount	€155,500 × 3.5%	€5,442.50
Municipal multiplier (assumed)	—	400%
Trade tax	€5,442.50 × 400%	€21,770.00
Credit against income tax	Four times the base amount: €5,442.50 × 4	€21,770.00
Remaining burden from the trade tax	€21,770.00 − €21,770.00	€0

The result surprises many: in the model case the trade tax is arithmetically neutral. Under § 35 (1) sentence 1 no. 1 EStG, the income tax is reduced by "four times" the tax base amount — at a multiplier of exactly 400% that covers the trade tax precisely. Two qualifications remain: under § 35 (1) sentence 5 EStG the deduction is "limited to the trade tax actually payable", and the relief only works to the extent that income tax is actually attributable to the trade income at all (the relief ceiling, § 35 (1) sentence 2 EStG). Above a multiplier of 400% a remainder stays uncovered.

The real arithmetic therefore sits elsewhere: had the same four units been sold from private assets more than ten years after purchase, the €180,000 gain would have been entirely tax-free. As a commercial property trade it is taxed at the personal rate. Anyone planning disposals should put that difference into the cash flow of the property before the notary appointment is booked.

Three things you can actually control

Count objects, not contracts. Keep a list with acquisition and disposal date per unit. The counter runs per object, and splitting a building into condominium units multiplies it.
Know the distance from acquisition. A sale in the fifth year and one in the sixth are two different things in tax terms. Whoever can postpone a sale by a few months also shifts the burden of proof.
Document building works. Major construction can tip the assessment (see the case law below). Record scope, occasion and timing — you need the same documentation anyway to distinguish post-purchase renovation costs (anschaffungsnahe Herstellungskosten).

What the courts have decided

The three-object rule is judge-made law — here the case law is not a supplement but the source itself. Three decisions of the Federal Court of Finance (Bundesfinanzhof, BFH) mark out the edges.

BFH, judgment of 15 January 2020 – X R 18/18, X R 19/18

A building let privately for many years can grow into a commercial property trade — but the threshold is high. Under the headnote the owner must, with a view to a sale, undertake construction so comprehensive that the existing building is not merely extended or substantially improved but a new building is created. The Senate referred the case back to the tax court, so it set the standard rather than finding a trade. For landlords that means: an ordinary modernisation, even an expensive one, does not turn a held asset into trading stock — a gut renovation that doubles the usable space may. The decision is officially reported (V).

BFH, judgment of 3 June 2025 – III R 12/22

Five apartment-block properties, sold in the third year after acquisition in a single act of sale to a single buyer: under the headnote this crosses the three-object rule and indicates a commercial property trade. The dispute concerned the extended trade-tax deduction under § 9 no. 1 sentence 2 GewStG for a corporation; the concept of an "object" at issue is the same one that applies to a private investor. The practical consequence: a portfolio sale is not a way around the rule. Officially reported (V).

BFH, order of 20 March 2025 – III R 14/23

Time cuts the other way too. Where neither disposals nor preparatory measures occur within five years of each acquisition, the headnote holds that even the sale of a double-digit number of objects in the sixth year may, on the particular circumstances of the case, rule out a commercial property trade. The Senate dismissed the tax office's appeal. Here too the context was the extended trade-tax deduction of a GmbH, and the headnote stresses the particular circumstances of the individual case — this is no free pass for the sixth year. It does confirm that the five-year period remains the decisive observation window. Officially reported (V).

Frequently asked questions

Do inherited or gifted properties count?

This article deliberately makes no statement on that. The treatment of objects acquired without consideration follows administrative guidance and a separate line of case law that we could not verify in full text here. Raise this point specifically with your tax adviser before selling an inherited share.

Does the rule apply per person or per household?

Again: no unverified figure. Whether and when the property activities of spouses are aggregated is a question of attribution in the individual case and is answered by the courts in a differentiated way. Do not plan on marriage simply doubling the limit.

What happens to the first three sales once the fourth arrives?

On the logic of the case law, the conditional intention to sell is assumed to have existed already at acquisition or the start of construction. The earlier transactions are therefore drawn into the same assessment — the fourth sale does not take effect only from itself.

Can the presumption be rebutted?

Yes, but not by a declaration. The BFH allows rebuttal only "by objective circumstances", and "not by mere declarations of the taxpayer about his intentions" (III R 14/23). A file note about your own intention to hold is worthless; a documented, externally recognisable reason for the sale can help.

Am I safe with three sales?

No. The three-object rule is an indicator, not a ceiling. If other circumstances point to dealer-like activity — familiarity with the trade, systematic conduct, building with an intention to sell — a trade can exist below four objects as well.

Purchase and sale dates per property in one place

RenoDiary brings acquisition date, renovation costs and disposal together per property — the basis for keeping the five-year period in view before the fourth sale comes up.

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Sources

§ 15 EStG (income from a trade, in particular (2) sentence 1) — Gesetze im Internet (retrieved on 28 August 2026)
§ 23 EStG (private disposal transactions, (1) sentence 1 no. 1 and (2)) — Gesetze im Internet (retrieved on 28 August 2026)
§ 35 EStG (tax relief for income from a trade) — Gesetze im Internet (retrieved on 28 August 2026)
§ 2 GewStG (object of the trade tax) — Gesetze im Internet (retrieved on 28 August 2026)
§ 11 GewStG (tax base rate, allowance) — Gesetze im Internet (retrieved on 28 August 2026)
BFH, judgment of 15 January 2020 – X R 18/18, X R 19/18 (extension on a long-held property) — full text at the Bundesfinanzhof (retrieved on 28 August 2026)
BFH, judgment of 3 June 2025 – III R 12/22 (en bloc sale, concept of an object) — full text at the Bundesfinanzhof (retrieved on 28 August 2026)
BFH, order of 20 March 2025 – III R 14/23 (first disposals in the sixth year) — full text at the Bundesfinanzhof (retrieved on 28 August 2026)

This article provides general orientation and does not replace individual tax or legal advice within the meaning of § 3 StBerG. Whether a commercial property trade exists is decided by an overall assessment of the individual case; the example figures are illustrations. The assumed municipal multiplier of 400% is an example value and is set by each municipality itself.