The ministerial draft of the 2022 Annual Tax Act also proposes amendments to the German Valuation Act. Specifically, the valuation of real estate under the income and asset value methods is to be changed. The reason for the amendment is an adjustment to the Real Estate Valuation Ordinance (ImmoWertV), which was adopted in June 2021.
The following key amendments to the Valuation Act are planned:
Income and Asset Value Methods
The total useful life for certain building types ("single- and two-family houses", "rental residential properties", "multi-family houses", "condominium ownership" and "mixed-use properties" or "residential buildings with mixed use") will be increased from 70 to 80 years (new Annex 22 BewG).
Income Value Method
Under the income value method, operating costs will no longer be applied as a lump sum based on annual rent, but rather according to the values set out in Annex 23 BewG. The new Annex 23 specifies fixed administrative costs and maintenance costs based on square metres. In addition, a percentage allowance for rental default risk will be taken into account. It is important to note that the values differ between private and commercial use. Going forward, the values in Annex 23 BewG are to be adjusted annually with reference to the consumer price index.
Furthermore, the property interest rates will be reduced (e.g. for rental residential properties from 5% to 3.5%), which reduce the building value under the income value method.
Asset Value Method
For the application of the asset value method, several additional factors are to be used alongside those already in place. Specifically, these are a regional factor (the level of which, depending on the region, will be determined by the expert committee) and an age reduction factor.
In addition, the value figures in the asset value method will be increased to current market levels (Annex 25 BewG).
Conclusion
In practice, it can be assumed that real estate will be valued at a higher amount following the amendment to the Valuation Act. Accordingly, the tax burden on the gift or inheritance of real estate to a taxpayer will also increase. It is therefore advisable to complete any gratuitous transfers of real estate already planned before the Annual Tax Act enters into force on 01.01.2023. The extent to which an early transfer is also advisable for other real estate cannot be assessed in general terms. We therefore recommend contacting a Steuerberater (German Certified Tax Advisor). We will keep you informed about the further legislative process on this website.
Frequently asked questions
Frequently asked questions
What changes to the German Valuation Act does the 2022 Annual Tax Act bring for real estate?
The 2022 Annual Tax Act (Jahressteuergesetz 2022) aligns the German Valuation Act (Bewertungsgesetz) with the Real Estate Valuation Ordinance (ImmoWertV) of June 2021. The amendments primarily affect the income-based and asset-based valuation methods (Ertrags- und Sachwertverfahren) used for real estate appraisal. In practice, this regularly results in higher valuations for tax purposes.
How is the total useful life for residential properties changing under the Bewertungsgesetz?
The total useful life is being increased from 70 to 80 years for certain types of buildings. This applies to single- and two-family homes, rental residential properties, apartment buildings, condominium ownership, as well as mixed-use properties and residential buildings with mixed use. The longer useful life increases the assessed value.
What specifically changes in the income capitalisation approach for property valuation?
Management costs are no longer derived as a flat rate from the annual rent, but applied based on the fixed values of the new Annex 23 BewG, covering administrative costs, area-based maintenance costs, and a rental loss risk allowance. A distinction is made between private and commercial use, and the values are adjusted annually in line with the consumer price index. In addition, the property interest rates are reduced, for example from 5% to 3.5% for residential rental properties, which increases the building value.
Which new factors are considered in the asset value method (Sachwertverfahren)?
The asset value method now incorporates a regional factor, set locally by the appraisal committee (Gutachterausschuss), as well as an age reduction factor. In addition, the value figures under Annex 25 BewG have been raised to current market levels. Both adjustments typically lead to higher property valuations.
Why should gratuitous real estate transfers be completed before 01/01/2023?
The reform of the German Valuation Act (Bewertungsgesetz) is expected to result in significantly higher property valuations, which will increase gift and inheritance tax on gratuitous transfers. Planned gifts or anticipated inheritances should therefore be finalized before the new rules take effect on 01/01/2023. Whether an early transfer makes sense in a specific case should be reviewed with a Steuerberater (German Certified Tax Advisor).