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Reform of the real estate tax and valuation law is on the home straight

We knew for a long time that real estate tax is in need of reform. Then, on 10.4.2018, the Federal Constitutional Court declared that the valuation rules were unconstitutional. According to the court’s ruling, a new law has to be passed by 31.12.2019, otherwise no new tax assessments may be issued as of January 2020.

Aim – New rules that are consistent with the Basic Law

According to the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF), the key aim of the reform is “to rewrite the rules on real estate tax so that they are consistent with the Basic Law. Yet, in doing so, the municipalities should not make a profit – the total amount of property tax should remain the same.” Moreover, the new rules, which were approved by the lower house of the German parliament (Bundestag, BT) on 18.10.2019 (BT printed matter 19/11085), should be “fair in that property tax should continue to be based on the value of a property.” Therefore, social housing properties, municipal and non-profit housing associations and housing cooperatives should, under certain conditions, benefit from a discount on the base rate for real estate tax purposes.

The calculation of real estate tax

In the future, real estate tax will likewise be calculated in three stages: value x base rate for tax purposes x multiplier.

(1) Calculation of real estate value – The major factors are the respective value of the land (indicative land value) and the level of the statistically determined net rent exclusive of heating, lighting and other service costs. The latter will depend on the so-called rental level (Mietniveaustufe) for the respective municipality – the higher the rental level, the higher the rent in a municipality tends to be. Other factors are the plot area, type of property and the age of the building. The classification of municipalities into rental levels will be carried out by the BMF, on the basis of data from the Federal Statistical Office, using the average rents in all 16 German federal states. In 15 of the 16 German federal states the individual factors can already be accessed via the so-called BORIS system (an abbreviation for Bodenrichtwertinformationssystem, an information system for indicative land values).

(2) Compensation for value appreciation – In order to compensate for value appreciations vis-à-vis current values the so-called base rate for tax purposes will be massively reduced to 0.034%, which is approximately 1/10 of the previous value of 0.35%. Furthermore, social housing construction as well as municipal and cooperative housing are also supposed to receive funding from real estate tax revenues. That is why an additional discount of 25% on the base rate for tax purposes is planned for companies that enable reasonably priced housing.

(3) Adjustment to the multipliers by the municipalities – If, due to the revaluation, the real estate tax revenue of individual municipalities changes then they would have the option of adjusting their multipliers and, in this way, ensuring that their overall real estate tax revenue does not change significantly. The municipalities have announced that they will indeed do this.

Real estate tax “C” on plots that are ready for development

In the context of the real estate tax reform, towns and municipalities would be able to set an increased, standard multiplier on ready-for-development plots in order to mobilise these for building on. The draft law amending the Real Estate Tax Act for the mobilisation of ready-for-development plots for building on, tabled by the German government on 23.9.2019 (BT printed matter 19/13456) provides for this.

Opening clauses for the German federal states

The German federal states have reached a compromise to the effect that, on the basis of a corresponding amendment to the Basic Law, they would generally also be able to introduce their own real estate tax models (“opening clause”). Some federal states (e.g. Saxony and Bavaria) have already announced that they want to provide for so-called value-independent models for their municipalities.

Changes for other types of plots

Unlike in the case of residential plots, for let commercial plots no statistical data are collected that could be used for the valuation. That is why, in this case, the simplified asset value method would be used as a guide for real estate tax purposes. This method is used to determine the value of a plot on the basis of the normal production costs for the respective type of building and the indicative land value.

While for the valuation of agriculture and forestry businesses (real estate tax “A”) the income capitalisation method would continue to be used, nevertheless, it would be simplified and standardised. In future, determining real estate tax for agriculture and forestry businesses would be done on the basis of a standardised valuation for the stretch of land and the farmsteads.

Please note: The legislative package for real estate tax reform, which was passed by the Bundestag on 18.10.2019, still has to be approved by the upper house of the German parliament (Bundesrat) and promulgated in the Federal Law Gazette by 31.12.2019. However, it is considered to be certain that the reform will be finalised in good time before 31.12.2019. This is because the consequences of a failure to complete the reform would be too great for everyone (the federation, the states and the municipalities) and so failure is not an acceptable option.

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