date | theme

25. April 2022 | Valuation methods in real estate tax law: Details and background (this article)

14. February 2022 | Property tax in Lower Saxony 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!

16. September 2020 | Valuation of old construction properties in the case of inheritance tax and gift tax

Valuation methods in real estate tax law are of great importance, because this is how the value of these properties depends and usually improves or worsens the tax burden for you. It is therefore important to be informed about these methods. This also plays a role in the property tax reform, because it leads to some changes that we have already informed about. Among other things, we consider applied evaluation methods in special laws.

First of all, it is important to understand that an owner sometimes has to know exactly what his property or real estate is worth. There are different motives for valuing real estate. For example, a sale, a purchase, a gift, an inheritance or even a divorce can be grounds for evaluation. In addition, an assessment can also be made when considering own asset planning and providing an asset overview. However, this is a complex matter which requires the consideration of several factors and is at best done by an expert expert.

1.2.1. Property valuation principles

Now there are many tax types in Germany in which real estate can play a role. Therefore, there are also various legal assessment standards. Some are contained in laws that refer to special taxes, such as the Income Tax Act or the Inheritance Tax Act and Gift Tax Act. These specific cases naturally take precedence over more general rules. However, if tax laws do not contain their own assessment standards, then the assessment law is generally consulted. Because it is intended for this use.

First of all, in determining the value of real estate, the common value according to § 9 BewG, as with many other assets, is decisive. This value corresponds to the value to be achieved on sale, i.e. the so-called market value. There are different deadlines to consider. For the valuation, the day of entry into the land register is decisive for gifts of real estate, the day of death for an inheritance.

For the determination of the market value, the time to which the determination relates, i.e. the cut-off date and the legal circumstances are included. This includes, inter alia, the state of development, the state of contribution of the land, the state of taxation of the land and the type and measure of construction use according to the public building and planning law. In addition, the actual characteristics of the property and the other characteristics are important criteria. This includes information such as the size of the property, the design of the property, the nature of the land and the development. Finally, the location of the property also plays a decisive role.

1.2.2. Legal provisions for property valuation

1.2.2.1. Assessment against unit values

According to the first part of the Valuation Act, §§ 2 to 16 BewG, unless more specific provisions are laid down, the general valuation rules are decisive. In addition, the second part of the Valuation Act mentions valuation methods in real estate tax law, which are regulated in special laws. First of all, the unit rating is listed, which applies exclusively until the end of 2024. This assessment originally applied to the unconstitutional wealth tax.

Here it is necessary to distinguish between different types of assets according to § 18 BewG. The Valuation Act contains provisions for the valuation of agricultural and forestry assets, land assets and operating assets. Since real estate according to § 68 BewG generally includes land, buildings, other components and accessories as well as the inheritance building right and residential property, its valuation is decisive for real estate. However, the valuation of the basic assets has already been carried out since 1. January 2009 according to §§ 176-198 BewG, as can be seen in section 6 of the BewG.

According to § 76 (1) BewG, rented residential properties, commercial properties, detached houses, two-family houses and mixed-use land are to be valued according to the so-called income value method. Any other built-up land is to be valued according to § 76 paragraph 2 BewG with the property value procedure.

1.2.2.2. Assessment based on current procedures

Furthermore, the Real Estate Valuation Ordinance (ImmoWertV) contains a total of three different valuation methods for real estate in Germany. Accordingly, there is the already mentioned property value method, which usually indicates the replacement value of the object as a value. In addition, it calls the comparative value method, according to which comparative properties are used for the determination. And finally, the income-value method, where the yield thrown determines the value of the real estate.

At the beginning, the valuation law refers to the unit valuation, this is considered to be an independent procedure for determining the values of real estate subject to taxation. But by using the needs assessment for the assessment of the real estate transfer tax and the inheritance and gift tax, unit values will only be used for real estate tax and this only until 2024.

The reason is that this procedure has long been considered very critical. Because the unit values have always been based on very old values and have not been seen as comparable since reunification. For this reason, the BVerfG also ruled in its judgment of 10 April 2018 that the provisions of the unit valuation in connection with the assessment of property tax are unconstitutional. Therefore, only a brief overview of the methods used there so far follows.

First of all, in the valuation methods in real estate tax law, it is necessary to consider the known income value method, which, as already mentioned, is mostly used for rental properties. In this process, it is important to know that the value of the land was composed of the value of the land, the value of the buildings and the value of the external layers according to § 78 BewG. The annual raw rent according to § 79 BewG with the addition of a duplicator according to § 80 BewG is used for the calculation. The information on the respective duplicators can be found under Annexes 3 to 8 BewG.

With the valuation method often used in real estate tax law, the income value method, there are special advantages for old-fashioned properties. Because these are rated very favorably due to the already long service life.

It should also be noted that internationally in real estate valuation the discounted cash flow method is often used instead of the income value method common in Germany. In this country, the procedure is also becoming increasingly popular, but is not yet prescribed as a possible evaluation method.

Now there is the property value method, which is used exclusively if no income can be determined at the property. Accordingly, this also makes it impossible to use the preferred yield value method. This is often the case with public buildings, including historic buildings such as castles and castles, and less often with property properties.

In the property valuation method, the construction plant is now evaluated on the basis of average production costs. This corresponds to the building property value. Then the land value of the property is determined and together they result in the value of the property. In this case, the soil value is basically determined using the comparative value method, which will be discussed subsequently. If the value of the land determined does not correspond to the common value, an adjustment to the common value is necessary.

Now the property valuation process can be considered very critical, since it only calculates the value of the property based on past values and the future market development is completely excluded. Nevertheless, it can be used as an intangible value at least as a minimum value, since this corresponds to the liquidation of all materials used for production. Mostly the market price is nowadays quite higher. A similar method is also used in the valuation of companies, namely the substance value method.

In addition, the comparative value method must be mentioned. It is important to compare the property to be evaluated with equivalent objects, which were mostly recently traded on the market. In the case of land, factors such as location, size and soil conditions play a role. On the other hand, for buildings and residential real estate, the type of building, the construction, the year of construction and the substance, the size, the structural condition and the quality of the equipment are considered as a benchmark. The procedure is applied, for example, to condominiums and one- and two-family houses and is considered a reliable valuation method. However, it is usually combined with the property value method.

All three procedures mentioned are still valid today, but the previous paragraphs and legal bases no longer correspond to the usual legal bases. Therefore, the exact procedures must be looked at again in particular.

Now, as we have just learned, the property tax is no longer valid as it existed until now. Therefore, we have already looked at the new regulations in the federal states of Bavaria, Baden-Württemberg, Lower Saxony, Hesse, Saxony, Saarland and the Hanseatic city of Hamburg. These apply nationwide from 2025.

From January 1, 2025, the basic formula will apply: value of the property x number of taxes x lifting set. Before that, however, the revaluations of the buildings start from 01. January 2022, which requires landowners to submit a statement of assessment by the end of October 2022.

Now we come to the valuation of real estate under the inheritance and gift tax. As of 2009, the comparative value method applied. In principle, this first results in excessively high initial values, which the tax office first determines itself by means of a method which does not record the market value due to a lack of data. This is because similar objects are grouped and evaluated almost uniformly. Consequently, details of the valuation object and the reference to currently valid values on the market may be missing.

Now an expert, by a taxpayer, can be forced to prove by an appraisal a lower value according to § 198 BewG. The burden of proof and proof lies with the same taxpayer in the proceedings pursuant to § 198 BewG. In doing so, it may use all recognised valuation methods. The management tax office usually requires an valuation report from a publicly appointed and sworn expert. If the property is sold within one year of the succession, the purchase price is generally accepted as proof of market value without corrections. In addition, BFH has recognized the purchase price up to three years afterwards, if the effect of the purchase price, which declines due to the time interval, is supplemented by an expert statement and the achievable annual rents have remained the same.

The different valuation methods in real estate tax law are useful for different situations. However, for operational purposes, the income method is often used and for private purposes more often a combination of comparative and non-cash method. If you are more interested in the individual procedures, we will be happy to advise you on this. In addition, we have also already designed some articles and adapted them to the regulations applicable since 2009 and illuminated them again in more detail.