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The property tax reform – why property tax is gaining in importance

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​​​published on 10 March 2022 | reading time approx. 4 minutes

 

Due to the property tax reform, property tax will increase in importance, especially also in relation to real estate transactions. On the one hand, the property valuation regulations will partially vary across Germany's states. On the other hand, property tax payers will have new disclosure obligations to meet after the property tax reform.

 

Background

In its judgment of 10 April 2018 (BverfGE 148, 147 - 217), the Federal Constitutional Court declared property valuation for tax purposes unconstitutional and determined that the valuation approach applied so far may no longer be applied after the end of 2024. With the adoption of the Property Tax Reform Act (GrStRefG) in November 2019, the federal government formulated new valuation rules on time. The Property Reform Implementation Act itself was passed on 25 June 2021. All real properties are to be revalued for the first time as of 1 January 2022. The new property tax itself will apply from 2025.

 

Federal model

In future, property valuation will depend on the federal state in which the property is located. The so-called federal model was anchored in the Property Tax Reform Act. Nevertheless, some states have made use of the new state opening clause introduced in Article 72 (3) sentence 1 of the Basic Law for the Federal Republic of Germany and introduced their own valuation models for determining property tax. The federal states that decided to apply the federal model include Berlin, Brandenburg, Bremen, Mecklenburg-Western Pomerania, North Rhine-Westphalia, Rhineland-Palatinate, Saxony-Anhalt, Schleswig-Holstein and Thuringia.

 

The property tax reform does not fundamentally change the previous basic framework for determining property tax. Property tax will continue to be calculated as follows from 2025: land value x figure for determining the taxable base x assessment rate. However, the rules for determining the land value will change. In the federal model, the land value for undeveloped real properties is determined by multiplying the area of the property by the standard land value. In the case of residential property, the approach used for determining the land value is the income approach and in the case of non-residential property – the asset value approach. The figure for determining the taxable base arises from the law and was reduced from 3.5 per cent to 0.034 per cent for undeveloped and for non-residential real properties in the course of the property tax reform. For residential real properties, the  figure for determining the taxable base will be 0.031 per cent in future. By multiplying the land value by the figure for determining the taxable base, the responsible tax offices determine the amount of the taxable base. The property tax is ultimately determined by multiplying the taxable base amount by the assessment rate individually determined by the individual municipalities themselves.

 

State opening clause

The state opening clause has been used by Baden-Württemberg, Bavaria, Hamburg, Hesse and Lower Saxony. In future, these federal states will apply their own models for calculating property tax. Saarland and Saxony follow the value-based federal model, but on the basis of their own figures for determining the taxable base.

 

In Baden-Württemberg property tax will in future be calculated on the basis of the modified land value model by multiplying the area of the property by the standard land value. The developed area is irrelevant for the valuation. Bavaria introduces a pure area model. The amount of the property tax is calculated on the basis of the size of the property and the buildings. The property tax is then calculated by multiplying the area of the property or the building by the value-independent equivalence number and the assessment rate applicable in the respective municipality. Hamburg, Hesse and Lower Saxony have followed the Bavarian area model. However, the valuation of property in these states takes into account also a location factor where the tax on property situated in a better location is higher than in the case of property in a less good location (the area factor method). The design of the model varies across the federal states only in detail.

 

Tax return and disclosure obligations

The land values will be assessed for the first time as of 1 January 2022. Thereafter, for all real properties, except those located in Bavaria, the land value will be determined every seven years. In Bavaria, it will be assessed once as of 1 January 2022.

 

Another new feature is the obligation of the property tax payer to disclose changes in the actual circumstances that have an effect on the land value, the type of asset or property, or that lead to the initial assessment. In such cases, the property tax payer is required to file a simplified return by 31 January of the following calendar year.

 

The need to act now

Property tax payers have only between 1 July 2022 and 31 October 2022 to submit the assessment return with 1 January 2022 as the assessment date. In order to ensure that the tax returns are submitted in a timely manner, tax payers should therefore already act now. The first step is to clarify in which federal state the property is or properties are located. This is because, depending on the federal state, the range of documents required for the preparation of the tax return can significantly differ. The second step is to compile the information relevant for determining the property tax and, if necessary, to obtain or identify further necessary documents and data.

 

In the case of residential property to be assessed according to the federal model, the size of the property, the type of the real estate, the age of the building, the living space, the “net cold rent” (i.e. rent without heating costs and other additional expenses) and the standard land values are particularly relevant. In the future, it will be possible to retrieve the standard land values uniformly via BORIS (standard land value information system). The net cold rent depends on the rent level assigned to the respective municipality and arises from Annex 39 to Article 249 of the Valuation Act (BewG). It is thus no longer necessary to indicate the actual or customary rent. The remaining information should be retrievable, for example, from the real property purchase agreement or the construction plans. For non-residential real property to be valued according to the federal model, the asset value method is applied. Under this meth-od, the gross floor area must be indicated, which is the total of the floor area of each floor of a building according to DIN277 inside the building envelope. To determine the gross floor areas, experts such as architects or real estate appraisers may have to be consulted. In the case of buildings for which no or only very few documents are available, the determination of the gross floor area may be particularly complex.

 

Conclusion

In the future, property tax will increase in importance, especially in the context of real estate transactions. In the future, it will be necessary to check in the context of transactions whether the property tax payer has complied with his or her disclosure obligations, also in the event of any change in the actual circumstances. Furthermore, the value assessment every seven years will have an effect on the amount of property tax and will presumably lead to regular increases in property tax. So, also this aspect should be taken into account in transactions and, if necessary, priced in.  

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