How to best approach a project when the existing house is the equity

They are giving up all securities - are they aware of that?

I have already pointed that out too.

The problem I see is that parents-in-law are supposed/willing to hand over their retirement provision/assets to the children just like that, judging by what it says. The “we” here has no value, since it concerns you as builders. Or you already have other arrangements in view... but that would all have financial (tax) implications.

I consider this idea very naive, simply gifting their assets. Not only will they then be left without reserves for potential care costs (we’re not even talking about 200€ for crutches, but about 3000€/month for care), but the authorities can later hit you hard if they are penniless and cannot pay for their care.

The parents-in-law get a lifetime right of residence in the new house and live rent-free.

Hmm. And if a) they can no longer stay there due to illness, you’ve reached the point mentioned above. And then there are scenarios b) if you separate... then the house is practically unsellable because their parents still live there... …or what if c) one of you dies, e.g. her: You then eventually have a new partner, and the parents feel very uncomfortable because all they have left is the right of residence, which wears them down. These are not worst-case scenarios either, I have experienced all of this myself. My parents knew an 80-year-old senior who was practically bullied by the new partner, and here in the forum there are also some who know how quickly you can grow apart or form new bonds. But well, everyone has to decide for themselves. But you asked. As a parent, I would not agree to such a deal unless there are conditions we don’t know about here.

Sorry, but your planning is pretty nonsensical:
- the parents-in-law give up their security of being able to live the rest of their lives in their familiar environment.
- you pay (680k-400k)*25%=70k taxes to the state treasury
- as of today, you don’t even have a plot of land.

Where do you want to build? Honestly: with your available monthly net income of 9k, build without a granny flat. Save money, you can finance it alone. And when the parents eventually die, you sell their house and pay off your loan after the fixed interest period (max. 10 years).

Building a house is one of the most common causes of divorce. All the stress, the extra work, financial worries, delays, uncertainty about when things will continue, etc. On top of that, the current crises...

Even if my in-laws offered me something like that, I would stay away from it. Just because I would always be morally bound in some way. "You want to leave? But WE gave YOU so much money 10 years ago..."

I also wonder why, with that income, one cannot manage on their own and wants to take such risks.

Given your income situation, I would - from personal experience - not worry too much about the equity situation. Any usufructs or similar encumbrances on your new house, in my opinion, cause more difficulties with the bank.

I would
A) first clarify with the tax advisor how to optimize the inheritance from a tax perspective.
B) generally keep the assets more "separated." If the parents-in-law want to move into the new house, they can keep the old one, rent it out, and pay you rent for the granny flat. That improves your income situation for the bank additionally, without encumbrances on the house.
C) even currently, regardless of how high the income is, not build new. We also decided against it and prefer to renovate an existing property. Although not free either, it is significantly cheaper if you keep your eyes open – additionally, in the used house market around us, there is already a noticeable consolidation happening; houses can drop around 150k in price within 4 weeks...

Existing properties are currently so cheap because they often still have an oil heating system and therefore require extensive renovation. I would also not buy a house with a heat demand of 200 or 250 kWh/m²/a with a 25% discount at the moment...