Before any discussion of capital gains participation can take place, two fundamental questions must be clarified: Who owns the property – and which marital property regime does it belong to?
From a civil law perspective, it is initially decisive who is registered as the owner in the land register. In addition, under the statutory matrimonial property regime of participation in acquisitions (Errungenschaftsbeteiligung), it must be determined whether the property is the separate property (Eigengut) or the acquisition (Errungenschaft) of a spouse. This classification forms the basis for the later division of assets in the event of a divorce.
What does capital gains participation mean?
For example, if a property belongs solely to one spouse and is that spouse’s separate property (perhaps because it was acquired before the marriage), it generally remains their asset in the event of a divorce.
However, the other spouse may still have a claim to a share of the increase in value. This is particularly the case if, during the marriage, funds from the acquisition – typically income – were invested in the property. Examples include:
- Mortgage repayments from ongoing income
- Renovations or extensions
- Major investments from jointly saved funds
If the acquisition contributed to the financing or appreciation of the property, capital gains participation may arise.
Such capital gains participation, however, is not limited to benefiting the acquisition. In principle, if one asset mass contributes to the financing or appreciation of another asset mass, the contributing asset mass may be proportionally entitled to a share of the subsequent increase in value. This means, for example, that even the separate property of the other spouse can have a share in the property’s increase in value if investments were made from it. The decisive factor is always which asset mass the investment comes from and which asset mass benefited from it.
Important: Ownership and profit-sharing should be considered separately
It is important to understand that capital gains participation does not change ownership of the property. If the property belongs civilly to only one spouse, they remain the sole owner during and after the marriage. Capital gains participation concerns only a financial compensation claim in the context of the marital property settlement, not the ownership itself.
Practical advice before marriage
Properties can appreciate significantly over the years. Without a clear arrangement, this often leads to complex calculations and disputes over contributions and claims in the event of a divorce.
Anyone who already owns a property or plans to acquire one should therefore consider a prenuptial agreement before marriage. This can, for example, regulate:
- Whether investments by the other spouse should lead to capital gains participation
- How contributions to the mortgage or renovations are accounted for
- Whether a property is wholly or partially excluded from the marital property settlement
Early and clear regulation creates transparency and can prevent future conflicts – especially for assets with long-term potential for value increase, such as real estate.
Our tip: Whether you are going through a separation or planning to get married – it is always worth seeking legal advice at an early stage. We are happy to assist you with any questions regarding property matters in family law, disputes over matrimonial property in the event of a divorce, and the drafting of prenuptial agreements as a precautionary measure.
If you have any questions regarding family law or the drafting of a prenuptial agreement, the attorneys-at-law and notaries at Pilatushof AG will be happy to assist you.