Germany: Status of property tax reform

The date for the revaluation of properties for the purposes of the reformed property tax is drawing ever closer.

Revaluation of properties for the purposes of the reformed property tax

Implementation of the German property tax reform is in the final stretch, and the federal property tax model as well as the state models that deviate from the standard federal model is now in place.

In particular, the date for the revaluation of properties for the purposes of the reformed property tax is drawing ever closer.

  • The first main assessment using the new property tax values is to take place on 1 January 2022.
  • The new property tax values apply for the first time for taxation in 2025.

Overview

In April 2018, the German Federal Constitutional Court declared the previous valuation system for property tax unconstitutional and granted the legislature a deadline until the end of 2019 to find a new regulation.

The German Property Tax Reform Act was announced on 2 Decem­ber 2019. The reform specifies taxa­tion based on a value-dependent property tax model in the form of the rental value method and the replace­ment costs method, but also includes an escape clause for the federal states. According to this escape clause, the federal states can deviate from the federal regu­lations in favour of other models.

As things currently stand, five federal states have made exten­sive use of this clause. Two federal states are using the federal model with adjusted tax assess­ment factors and nine federal states are applying the federal model without any changes.

Federal model

According to the amendment to federal law, the value of undeve­loped land is determined using the standard land values calculated by expert committees.

With regard to developed land, a standard simplified rental value method is applied as the valuation method for residential property which is tied to the sustainable realisable net income. The value of developed (residential) property consists of the standard land value and the average rental value for the building in question.

In the case of detached and semi-detached houses, rental housing and owner-occupied properties, the rental value is typically assumed based on the notional net rent depending on the location of the property to reflect the change in value in recent decades due to rising property prices. At the same time, the tax assess­ment factor as second factor in the calculation is reduced to counter a rise in total property tax revenue.

The replacement costs method is applied particularly to non-residential properties as it is currently not possible to calculate any average net rents (excl. heating costs) for these properties using available statistical sources. The replacement costs consist of the land value and the building's replacement costs, which are based on the normal production cost.

In the case of agricultural land and forestry, a separate rental value is used which is based on the capitalisation of average earnings in relation to the respective use.

State models

All of the federal states have already announced whether they intend to follow the federal model or make use of the escape clause.

  • Berlin, Brandenburg, Bremen, Mecklenburg-Western Pomerania, North Rhine-Westphalia, Rhineland-Palatinate, Saxony-Anhalt, Schleswig-Holstein, and Thuringia are applying the federal model.
  • Baden-Württemberg, Bavaria, Hamburg, Hesse, and Lower Saxony have developed their own valuation models.
  • Saarland and Saxony are using the federal model with adjusted tax assessment factor.

All of the states will be following the rules of the federal model for the valuation of agricultural land and forestry.

In some cases, the state laws have already been passed or are at least in the draft bill stage. While the value-dependent federal model uses the market value, the state models are based on area models that are not dependent on value and that, with the exception of Bavaria, all take into account location-specific factors. The exception is Baden-Württemberg, which uses a model based purely on land value. All of the state models also provide preferential treatment for residential use.

Read an October 2021 report [PDF 337 KB] prepared by the KPMG member firm in Germany

 

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