I. Background

In the opinion of the legislator, a “technically necessary need for legislation” has arisen in various areas of tax law. The draft of Annual Tax Act 2022 therefore provides several amendments to property valuation tax, income tax, value added tax and procedural law. The legislative process is expected to be completed this year. The legislative amendments will come into effect on 1 January 2023.
This newsletter article focuses on the planned amendments to the Property Valuation Act. The methods for the valuation of real property has to be adapted to the amended Real Estate Valuation Ordinance (Immobilienwertermittlungsverordnung) of 14 July 2021. In addition, the legislator refers to constitutional requirements that make it necessary to adjust the outdated valuation parameters to the current market level.

II. Real Estate Valuation for Inheritance and Gift Tax Purposes

For inheritance and gift tax purposes, the Property Valuation Act stipulates the binding methods for determining the value of domestic real estate. The type of property and the type of use determines which valuation method is relevant. Depending on the classification of the property and the available market data of the local appraisal committee, the valuation is carried out according to the so-called comparative method (Vergleichswertverfahren), the income method (Ertragswertverfahren) or the asset value method (Sachwertverfahren). Irrespective of these valuation methods, however, there is always the possibility of proving the lower market value of a property by submitting an expert opinion.

III. Planned changes at the turn of the year

As of 1 January 2023, two of the three valuation methods, namely the asset value method (Sachwertverfahren) and the income value method (Ertragswertverfahren) are to be changed, while the comparative value method (Vergleichswertverfahren) will remain unchanged. The following changes in the valuation parameters will have an impact on the real estate value: Reduction of the property interest rates, the abolition of the average construction costs of the building and the introduction of a regional factor. In addition, the utilization period will be increased from 70 to 80 years, which will also result in higher real estate values.

IV. Higher real estate values from 2023

The planned measures will make the valuation under the Property Valuation Act even more complex. Due to the large number of determinants, the expected increases in value and potential additional burdens cannot be quantified in general terms. However, example calculations show that for inheritance and gift tax purposes, real estate values can increase by more than 20%. In certain cases, the increase in value can be even higher. For example, the value of a twenty-year-old one-family house with a gross floor area of 300 square meters and a plot size of 600 square meters (at a standard land value of 650 euros per square meter) can increase from just under EUR 582,000 (legal situation until 31 December 2022) to around EUR 852,000 (legal situation from 1 January 2023). At this point, however, it should be pointed out once again that the exact value (increase) depends on numerous factors such as the type of construction and condition of the house as well as on the new regional determinants that will be added from 2023. The regional factors have not even been published yet.
Furthermore, it should be noted that the value determined in the example using the asset value method (Sachwertverfahren) is only used as the basis for taxation if the tax office does not have any comparative market prices or comparative factors. This is because one- and two-family houses and condominiums are primarily to be valued using the comparative value method (Vergleichswertverfahren), i.e. on the basis of the prices of other, sufficiently comparable properties that have actually been sold. In these cases, the reformed asset value method is therefore used only as a secondary method.
Since it will often not be known in advance of a transfer whether the local appraisal committee is aware of market prices for comparable properties, there has always been a certain degree of uncertainty in the valuation of one- and two-family houses and condominiums. With regard to the amendments, it should be examined in each individual case whether a property transfer should be executed in accordance with the old valuation law, i.e. before 31 December 2022.
In the case of real estate that is to be valued using the income value method (Ertragswertverfahren), there will be a change in valuation as of 1 January 2023 without exception. This means properties that are initially used for more than 80% residential purposes, but which do not qualify as one- or two-family homes or condominiums according to the legal definition. However, the changes also affect commercial properties and mixed-use properties, as these are also to be valued using the income value method (Ertragswertverfahren), provided that a customary rent can be determined on the local property market in the respective individual case. If this is not the case, the valuation is carried out using the asset value method.
Accordingly, (business) properties held as private assets and properties used for business purposes and mixed-use properties are affected by the amendments to the law without exception.
Regardless of the upcoming changes to the law, it is still possible in all cases to prove the individual market value of a property with the help of a (possibly expensive) expert opinion. In this context, the high formal and substantive requirements imposed by the tax authorities on such a valuation report must be observed.

V. Real estate valuation in special cases

The Annual Tax Act 2022 will also comprehensively reform the valuation rules for leasehold cases and cases involving buildings on third-party land. In each individual case, it must also be examined whether this will result in higher valuations compared to the current legal situation.
The amendments to the Property Valuation Act may also have an impact on real estate transfer tax if the minimum assessment base needs to be determined for real estate transfer tax purposes. This may be the case, for example, in corporate transactions (“share deals”).

VI. Consequences for practice / actions before the end of the year

Due to the expected higher valuations for domestic real estate, a higher gift tax burden is to be expected in many cases as of the year 2023. Anyone who is thinking about transferring real estate by way of a gift could benefit from a transfer executed before 31 December 2022. According to the case law of the Federal Fiscal Court (BFH), it is sufficient for the execution of the gift if the conveyance is declared, the possession, benefits and burdens are transferred to the beneficiary and a third party has been authorized to receive or make the necessary declarations (e.g. the notary).
The amendment is not expected to have any effect on one- or two-family houses or condominiums for which comparative market prices are available from the local appraisal committee. In these cases the comparative value method (Vergleichswertverfahren) is applicable.
In addition, it should be noted that the increase of tax allowances within the family (transfer to spouses or descendants) is currently being discussed politically. With this in mind, a real estate transfer could even be counterproductive. In case of uncertainty, a corresponding retransfer right in the contract can be helpful.