Property tax reform

Every property in Germany is subject to property tax. After decades of using the so-called assessed values as the basis for assessment, the German Federal Constitutional Court declared the assessment of the tax according to these assessed values to be unconstitutional in 2018.

Consequently, Germany is now faced with the task of revaluating every plot of land or property. The valuation will take place as of January 1, 2022, the tax authorities will publicly request the filing of corresponding tax declarations. It is currently assumed that the declarations will have to be submitted from July 1, 2022 until October 31, 2022 at the latest.

What is property tax?

The property tax is a tax on the ownership of real property; the revenues from the property tax accrue to the municipalities and represent a significant source of revenue.

Up to now, a distinction has been made between Property Tax A for agricultural and forestry operations and Property Tax B for all other properties within the meaning of the German Tax Valuation Act. This includes not only the land but also the buildings on it. The properties are valued according to economic units, for example, a rented residential property (apartment building) at 12 A Street. However, legally independent units such as condominiums also count as properties within the meaning of the German Tax Valuation Act and must therefore be valued separately as economic units. 

The tax office determines the basis of assessment, i.e., up to now the respective assessed value and issues the so-called base assessment notice for property tax by applying an assessment factor (Messzahl). The respective municipality sets the respective property tax on this value by applying an assessment rate (Hebesatz).
 

What is the property tax reform’s background?

Previously, property tax was determined based on the assessed values. Originally, these values were to be recalculated every five years (so-called main assessment dates). In fact, the only main assessment was performed as of January 1, 1964, which explains why the values of newly constructed buildings are still based on the 1964 value ratios and the assessed values determined are far from the actual market values. In the new federal states, the assessed values are based on January 1, 1935, since no revaluation was performed as of January 1, 1964. 

In 2018, the German Federal Constitutional Court ruled that the assessment of property tax based on values no longer corresponding to actual values was unconstitutional. The legislature was requested to adopt a new statutory regulation by the end of 2019 and to implement it with effect from January 1, 2025 at the latest. As of this date, the assessed values must no longer be used as the basis for calculating the tax.
 

How does the property tax reform work?

Due to the previous assessment basis’s unconstitutionality, the federal and state governments agreed on the Real Estate Tax Reform Act in November 2019, creating the so-called federal model. At the same time, however, the states were given the option of deviating from the federal model regarding how real estate is to be valued for property tax purposes. Regarding Property Tax B, the states of Baden-Württemberg, Bavaria, Hamburg, Hesse and Lower Saxony have used this option. The states of Saarland and Saxony generally apply the federal model but use different assessment factors as a basis. Due to the reform, Germany for the first time no longer applies a uniform valuation of real estate. 

Another new feature is that the federal states have been given the option of introducing Property Tax C. This allows to subject undeveloped but ready-for-development land to a higher property tax to create an incentive for rapid development.

The first new date for determining the value was set at January 1, 2022. According to estimates, around 36 million properties will have to be revalued by this date.
 

How will the reform be implemented?

In 2022, every real estate owner is required to submit a declaration electronically for the determination of the property tax value to the tax authorities. This involves declaring property-related data, which, however, differ according to the property’s type of use. In addition, the country-specific peculiarities must be considered. The tax authorities will issue a public request to submit the declarations. It is currently assumed that filing will be possible from July 1, 2022, with October 31, 2022 being the latest date. This means that 36 million declarations are to be submitted to the tax authorities within a period of four months.
 

How will property tax be calculated in the future?

The previous procedure for determining the property tax remains basically unchanged. This means that the property tax is determined as follows:

• Property tax value: determined by the tax office based on a declaration on the determination of tax bases 
• Assessment factor: stipulated by law
• Assessment rate: determined by the city or municipality
   

What are the different valuation models?

Valuation according to the federal model
In the federal model, which is followed by most of the federal states, the type of valuation depends on the type of property. While detached and semidetached houses, apartment buildings and condominiums are valued using the income approach based on rental values set by the federal states, commercial properties, mixed-use properties and other developed properties are valued using the asset value approach. As in the case of undeveloped land, both the income approach and the asset value approach consider the value of the land based on the standard land values determined by the appraisal committees as of January 1, 2022.

According to the income approach, the property tax value is determined from the sum of the capitalized net income and the discounted land value.
Under the asset value method, the land value and the value of the building are determined separately. This real building value is determined by multiplying the so-called normal production costs by the gross floor area.

Baden-Württemberg - Modified land value model
The so-called “modified land value model” is used for the Property Tax B. Contrary to the provisions of the federal model, this valuation procedure does not consider any development of the land, as the property tax value is determined exclusively by multiplying the land area by the standard land value. Furthermore, the Land Tax Act of Baden-Württemberg provides that land that is predominantly used for residential purposes, as well as social housing and cultural monuments, are subject to tax advantages. For this purpose, the statutory assessment factor is reduced by 30% in the above-mentioned cases.

The formula for calculating property tax is therefore generally as follows: 
Property tax = property tax value (land area x standard land value) x assessment factor x assessment rate. 

Bavaria – area-related model
The Free State of Bavaria has opted for a value-independent valuation model, the so-called area-related model, for the revaluation of real property under the Property Tax B. Land and building areas are multiplied by fixed equivalent figures (land EUR 0.04 /sqm and buildings EUR 0.50 /sqm) to determine the property tax value. For residential spaces, an additional discount of 30% is granted, so that in this case only EUR 0.35 /sqm is applied. In addition, further reductions are provided among other things for social housing and monuments. The property tax value is the assessment basis, to which the municipalities in turn apply the respective assessment rate. The assessment rate set by the municipalities is thus the main lever in determining property tax in Bavaria. 

The formula for calculating property tax is therefore generally as follows: 
Property tax = property tax value (sqm land and sqm building, each multiplied by fixed equivalent figure) x assessment factor x assessment rate

 
Hamburg, Hesse, Lower Saxony - location model
The federal states of Hamburg, Hesse and Lower Saxony basically follow the value-independent valuation model of the Free State of Bavaria. In these states, too, fixed equivalent figures (land EUR 0.04 /sqm and buildings EUR 0.50/sqm) are used to value the land or buildings. The only difference is that an additional distinction is made between the respective economic units’ location. A so-called location factor is intended to ensure that properties in better locations are taxed higher than those in poorer locations. The discount of 30% for residential spaces, which is applicable in Bavaria, as well as the reductions for social housing and monuments are also applicable in the aforementioned federal states.

The formula for calculating property tax is therefore generally as follows: 
Property tax = property tax value (sqm land and sqm building, each multiplied by fixed equivalent figure) x assessment factor (if applicable, adjusted due to location factor) x assessment rate