date | theme

26. April 2022 | Income value method: Common valuation method for real estate (this contribution)

14. February 2022 | Property tax in Lower Saxony from 2025

10. February 2022 | Property tax in Hessen from 2025

03. February 2022 | The new property tax in Bavaria from 2025

03. January 2022 | Property tax reform 2022: what is new?

23. December 2021 | Real estate sale after divorce or with separated spouses – Attention tax trap!

The income value method as a valuation method is very common in its application. However, it is considered a rather complex procedure because some values are difficult to determine. Good market knowledge is also required. On the other hand, there are also other valuation methods in real estate tax law. This can include the comparative value method and the property value method. In addition, internationally recognized methods, such as the discounted cash flow method, are increasingly associated with interest and increasing recognition in Germany.

First of all, it should be noted that in the income value method, real estate is valued in principle, for which the achievement of returns is a primary objective. This is also the focus of this article. Because there are also other common and recognized evaluation methods, as they are recognized in German courts on the one hand and are internationally common on the other. These procedures are deepened in other contributions.

In the income value method under consideration, the main factors are the property-specific land value and the gross yield of the property. The soil value is determined by multiplying the soil guide value by the land area in square meters. Because this indicates the value for an undeveloped or also fictionally exposed property. On the other hand, the gross yield is determined on the basis of other factors. Here, the actual or usual annual rent for closed lease contracts is in the foreground. It also deducts management costs. After the yield has been determined, it is multiplied by a multiplier defined by the legislator. This depends mainly on the age of the property.

In order to be able to properly explain the income value method, it is necessary to look into the valuation law. This provides the relevant information. Therefore, according to § 182 BewG, mainly rental land and commercial land as well as mixed-use land for which a normal rent can be determined on the local real estate market must be valued using the income-valuation method.

In addition, § 184 BewG provides further information on the application of the income value method. Accordingly, according to § 184 (1) BewG, the value of the buildings, also referred to as the so-called building yield value, must be determined separately from the land value on the basis of the yield according to § 185. The land value is the value of the undeveloped land according to § 179 BewG and is considered unusable. Whereas the building value is also determined on the basis of its remaining useful life. Together, as already mentioned, the land value and the building yield value according to § 185 BewG then give the income value of the land. At least the soil value shall be used. In addition, the rule applies that other construction installations, in particular outdoor installations, are regularly compensated for the income value of the building.

There are some deviations compared to the determination according to the ImmoWertV. This is because, in accordance with the general income-value method according to § 28 ImmoWertV, the preliminary income value is determined by forming the sum of the capitalized annual net income share of the construction plants, which was determined by deducting the land-value-interest amount and the land-value. In the case of the simplified income value procedure of § 29 ImmoWertV, the land value is also discounted.

Now, according to § 185 BewG, the net income of the property is assumed for the determination of the building yield value. For this, the management costs according to § 187 BewG must be deducted from the gross income of the property according to § 186 BewG. In addition, the net income must be reduced by the amount resulting from an appropriate interest rate based on the real estate interest rate according to § 188 BewG of the Land Value. Thus, the building cleaner yield is subsequently obtained.

After that, it is necessary to multiply this building yield by the resulting duplicator. Here it is necessary to look at the Annex 21 BewG. Decisive for the duplicator are the real estate interest rate and the remaining use period of the building. In this case, the remaining useful life is determined from the amount between the total economic useful life resulting from the installation 22 and the age of the building on the assessment date. If, in accordance with § 185 (3) BewG, changes have occurred after the building has been ready for reference that have extended or shortened the overall economic life of the building, an extension or shortening of the corresponding remaining life of use shall be assumed. The remaining useful life of a building is regularly at least 30 percent of the total economic useful life.

2.2.1. Gross yield

In detail, we now go into the individual factors in determining the building yield value. The gross income according to § 186 (1) BewG is the fee payable for the use of the built-up property for a period of twelve months according to the contractual agreements applicable on the valuation date. However, annual contributions paid to cover operating costs are not relevant here.

In accordance with paragraph 2, for land or parts of land which are own-used, unused, for temporary use or provided free of charge, as well as for land which the owner has provided to the tenant for an actual rent deviating by more than 20 percent from the usual rent, the usual rent is to be used. The usual rent is to be estimated according to the rent paid regularly for rooms of the same or similar type, location and equipment. This again excludes operating costs.

2.2.2. Management costs

According to § 187 (1) BewG, management costs are the administrative costs, operating costs, maintenance costs and the rental loss risk incurred sustainably in normal management. In addition, operating costs covered by annual contributions are not taken into account.

In addition, management costs shall be based on existing experience rates. Paragraph 2 states that the sets of experience derived by the peer review committees for the period prior to the calendar year relevant for the assessment shall be applied. However, unless appropriate experience sets are available from the expert committees, the flat-rate management costs as set out in Appendix 23 shall be assumed.

2.2.3. Real estate rate

Finally, a real estate interest rate is required for the valuation of the property. This is the interest rate at which the market value of land is on average remunerated at market rates. Previously, the case has already been mentioned in which the expert committees do not have suitable real estate rates available. Then the following interest rates would apply. There are different stages to consider. First of all, an interest rate of 5 percent applies to rented residential properties and 5.5 percent applies to mixed-use properties with a commercial share of up to 50 percent. The latter is determined on the basis of the living and usable area. Furthermore, an interest rate of 6 percent applies to mixed-use properties with a commercial share of more than 50 percent. Finally, an interest rate of 6.5 percent applies to business properties.

*Soil indicative value per sqm (example): 600 €

= Soil value = 240,000 €

gross yield 50,000 €

– Management costs – €5,000

= net income of the property = 45,000 €

– Land value return (5%) – €12,000 (€240,000 * 0.05)

= Building income = 33,000 €

*Replicators (term of use 25 years) *14

= Building yield = 462,000 €

+ soil value + 240,000 €

= Preliminary income value = 702,000 €

– Other circumstances – 0 €

= Income value / Market value = 702,000 €

The different valuation methods in real estate tax law are useful for different situations. However, the income value method is often more complex but also more informative and therefore particularly popular with value assessments. But it usually provides very market-oriented and current market values for land and real estate.