What is the property tax reform all about?

The reform of property tax affects every citizen – whether they are a homeowner or a tenant. And it is also a fact that the revaluation of some 35 million properties will be a truly Herculean task. Such a massive reform is a rare occurrence, but following a clear ruling by the Federal Constitutional Court, the whole of Germany must now deal with the Assessment of property tax value deal with. But what exactly is this major property tax reform all about?

Time is running out, as there is still a great deal to be prepared. The new property tax regulations are due to come into force on 1 January 2025. In April 2018, the Federal Constitutional Court ruled that the previous method of calculating the standard values for land and buildings – on which the annual property tax is based – was unconstitutional in western Germany. The Federal Republic’s highest court obliged the legislature to reform the property tax. The Bundestag and Bundesrat finally approved the reform in autumn 2019: in future, the tax is to be based on the value of the land and the property – as set out in the federal model. However, an opt-out clause allows the federal states to go their own way.

Following the decision of the Federal Constitutional Court of 10 April 2018, the regulations governing the standardised valuation of land in the former West German Länder have, in any event, been incompatible with the general principle of equality since the beginning of 2002. The legislature’s adherence to the main valuation date of 1964 leads to serious inequalities in the valuation of immovable property, which are not sufficiently justified. The Federal Constitutional Court was required to rule only on valuation in the former West German federal states. However, the grounds for the judgement apply all the more to the former East German territories, as the date of 1 January 1935 is used as the basis there.

The timetable has been finalised

The reference date for the new main assessment of property tax values is 1 January 2022. To determine property tax values, property owners will be required to submit the relevant tax returns during the 2022 calendar year. The deadline for submission is 31 October 2022.

Local authorities are responsible for assessing and collecting the tax. The property tax assessment bases, which are to be determined on the basis of the property tax values, will be provided to the local authorities by the tax offices by mid-2024. From the calendar year 2025 onwards, local authorities will, for the first time, use the tax assessment bases derived from the new property tax values to determine the tax payable. Until then, the standard values will continue to be decisive for the determination of property tax assessment bases and property tax.

How has property tax been calculated up to now?

Until now, property tax has been calculated using a multi-stage process. The binding basis was the standard value, which the tax offices determined separately for each plot of land. The standard value was multiplied by a tax assessment rate laid down by law. The local authority in whose area the property was situated then applied its own assessment rate to the tax assessment amount calculated in this way.

How will the future tax regime differ from the current one?

In fact, not much is actually changing. This is because the new system is also based on the value of the land, the property tax assessment rate and the local authority’s tax assessment rate. Unlike before, however, the property value now depends on the standard land value and a statistically determined net rent excluding service charges, both of which are updated at regular intervals. The size of the plot, the type of building (private or commercial) and its age also play a role.

Federal or state model

The property tax reform includes an opt-out clause. This means that each federal state can decide for itself whether to adhere to the federal government’s guidelines or to go its own way. Seven federal states have already announced deviations. The federal model is being applied in Berlin, Brandenburg, Bremen, Mecklenburg-Western Pomerania, North Rhine-Westphalia, Rhineland-Palatinate, Saxony-Anhalt, Schleswig-Holstein and Thuringia. Here, the property tax is calculated on the basis of municipal data, the assessment rate, the rent level, the standard land value, the plot area, the type of property, the year of construction, the living space and the number of garage spaces. Saxony and Saarland have opted for a modified federal model with different tax assessment figures.

Baden-Württemberg is implementing a modified land value model. Only two factors are taken into account: the plot area and the standard land value. Bavaria has made use of the flexibility clause and opted for a „pure area-based model“. Hamburg is implementing its property tax model, known as the „residential location model“, in collaboration with Bavaria. Unlike in Bavaria, the residential location in Hamburg affects the amount of property tax payable. Hesse has opted for the so-called ‘area-factor method’. The basis for the valuation of building and land areas is the Bavarian area-based model, which is, however, supplemented by a location-related factor. Lower Saxony has enacted its own property tax law featuring an area-location model. It is very similar to the Hessian model, though not identical.

Fairer, but with a lot of red tape

The property tax reform is intended to ensure greater fairness in the calculation of property tax. However, as a result of the flexibility clause, there will be many different calculation models in future. Consequently, expert support from tax advisers will play a key role in the implementation of the reform.