Property tax reform: the federal model for property tax

The federal model for property tax reform takes into account a lot of data for determining the tax base.

For the majority of citizens, the federal model will be applied to the property tax. In the run-up to this, many proposals were discussed, which entered the race under names such as "land tax", "equivalence model" or "cost value model".

The ruling of the Federal Constitutional Court would therefore have been the ideal opportunity to make the property tax simpler, minimize the administrative burden and reduce the financial burden in major cities with particularly high rents. However, the regulations now included in the federal model don't really achieve any of these goals. Here's an overview:

• Residential Real Estate: Every four years, the Federal Statistical Office determines average rents for various building types and construction periods. In the case of residential properties, this average rent is reduced by up to 22.5 % or increased by up to 32.5 % to determine the assessment base, depending on the rental level of the municipality. However, the different rent levels in different residential areas within a municipality are not taken into account. The gross income thus determined is reduced by non-apportionable operating costs, for which typified percentages apply that depend on the building type and year of construction. For publicly subsidized housing, there is also a 25 % reduction in the assessed tax rate. The valuation approach using this "simplified capitalized earnings method" based on the average rent applies to all residential properties, i.e. both rented housing and owner-occupied properties.

• Land: The starting point for the valuation of land, both undeveloped land and the land value portion of developed land, is the standard land values. Undeveloped land is land on which there are no usable buildings.

• Commercial Real Estate: Unlike residential properties, no statistical data is collected for leased commercial properties that could be used for valuation purposes. For this reason, a simplified asset value method is used for the valuation of commercial real estate. This method takes into account in particular the typical production costs for the respective type of building and the standard land value when determining the value. All these values are laid down in the Valuation Act and do not have to be determined by the owner. Instead of the previous 30 items of information, therefore, only 8 items of information are now required, mainly on the size and age of the property. The simplified asset value method is also applied to mixed-use properties that are used partly for business and partly for residential purposes.

  

• Agriculture and forestry: In the case of the valuation of agricultural and forestry land (land tax A), the procedure used to date will be retained. In the past, these areas were already valued according to the typified capitalized earnings value, which always shows a value in line with reality. The procedure has now been further simplified. On the other hand, residential buildings used for agricultural and forestry purposes will in future no longer be subject to the property tax regime for residential property only in eastern Germany, but throughout Germany.

• Building land mobilization: In future, municipalities will have the option of levying their own rate of assessment (property tax C) on undeveloped land ready for construction. In municipalities that make use of this option, considerably more property tax will therefore have to be paid for such land in the future than before. Under certain conditions, this will enable municipalities to create an incentive for the construction of new housing and counteract land speculation. If a municipality has opted to levy property tax C, the assessment rate for all building-ready properties in the municipality must be uniform and higher than the regular assessment rate for the other properties in the municipality.

• Tax measurement number: In order to determine the basis of assessment of the real property tax, the value determined according to the different methods is multiplied by the real property tax rate. Up to now, this tax rate has been 0.35 %. However, in order to prevent a drastic increase in the property tax, the new property values, which are now significantly higher than before, will be corrected in a second step by radically lowering the tax measurement rate. Currently, the law provides for a measurement figure that is less than one-tenth of the old value. However, before the new property tax assessments come into force, the Federal Ministry of Finance intends to review whether there is a need for further adjustment here.