Adjustment of real estate valuation as of January 1, 2023

The Annual Tax Act 2022 introduces new statutory provisions in various areas of tax law. Within this framework, the regulations on real estate valuation for the purposes of inheritance and gift tax will also be adjusted. In future, the current market values are to be used as a basis, as they result from the Real Estate Valuation Ordinance (ImmoWertV) of July 14, 2021 (BGBl. I p. 2805). This amendment to the law results in extensive changes in the area of the capitalized earnings and asset value method, which is used to determine real estate values.

1. Changes in the capitalized earnings and asset value method

If real estate is transferred by way of gift, acquisition upon death or bequest, the real estate value must be determined separately for the purposes of inheritance and gift tax. This is done - depending on the type of property - either by means of the comparative, capitalized earnings or asset value method in accordance with the Valuation Act (Sections 177 et seq. BewG).

Significant changes are now being made to the capitalized earnings value method and the asset value method in particular. The aim of the amendments is to adapt the procedures for the valuation of real estate (including heritable building rights) to the new ImmoWertV. In this way, the regulations on the determination of market value will be adapted to developments in this area.

The determination of the capitalized earnings value method involves a change in the determination of operating costs. Instead of the previous flat-rate calculation based on a percentage of the annual rent, it is now stipulated that the management costs are to be made up of the actual administration and maintenance costs and the rent loss risk. In addition, the property interest rates are adjusted to the market level and reduced accordingly, resulting in higher values if the local appraisal committees do not provide interest rates; in this case, the comparatively quite high lump-sum property interest rates prescribed by law (Section 188 BewG) are to be applied. The legislature has recognized this leverage and plans, for example, to reduce the real estate interest rate for residential rental properties from 5% to 3.5%. As a result of the lower property interest rates, the values determined using the capitalized earnings value method will generally increase.

When applying the asset value method, the previous calculation of the building's real value is adjusted. This is now determined by multiplying the average construction costs of the building by the newly introduced regional factor and the age value reduction factor. The regional factor is intended to reflect regional differences in construction costs and is determined by the appraisal committees as appropriate. In addition, there are plans to adjust the value figures to the current market level, which will also lead to higher property values. The value figures used are the material value factors determined by the appraisal committees. If no suitable real value factors are available, the prescribed value figures are to be used. These value figures will be raised by the Annual Tax Act 2022 for properties in good locations from the previous 1.0 to 1.3 or even 1.4. The total useful life will also be changed, particularly for single-family and two-family homes, residential rental properties and condominiums. Here, the overall utilization period will be increased from 70 to 80 years. This will result in a higher capitalization of net income.

2. Higher land values

The planned changes will significantly alter the valuation of real property. It can be assumed that land values will be significantly higher in the future as a result of the changed valuation procedures than they still are for transfers that take place up to and including December 31, 2022 and for which the old valuation rules still apply. In any case, this is regularly the case if the appraisal committees do not themselves provide property interest rates or the value figures, but the amended statutory values are applied.

In addition to the increase in the assessment basis for inheritance tax due to the higher property values, in many cases this is also likely to result in the next progression level for inheritance tax being reached and/or the limit for a large acquisition (over EUR 26 million) of preferential assets being exceeded.

It is still possible to prove the actual lower fair market value of the real estate to the tax office by means of an expert opinion (Section 198 BewG). However, in view of the current price level on the real estate market, this will rarely be successful.

3. Effects for the Practice

If gratuitous transfers are already contemplated and concretely planned, they should, if possible, be considered before the end of December 31, 2022, and thus, if applicable, before the higher valuation rates are applied. However, it is a question of the individual case whether the planned changes will actually lead to a relevant increase in the value for inheritance or gift tax purposes and whether the transfer will actually still offer advantages in this year.

If you have specific plans or questions about the changes, we will be happy to advise you.