Real estate valuation newly regulated – higher inheritance tax and gift tax for real estate since 01.01.2023

Real estate valuation in the event of a gift or inheritance has always been a bone of contention. Now, the legislator has reformed the Valuation Act – and with significant effects on the calculation of inheritance tax and gift tax in connection with real estate. This is because the value of real estate has been determined on the basis of the market value for the calculation of gift and inheritance tax since the changes to the law on 01.01.2009.

These changes will present many (future) real estate owners with considerable financial challenges in the event of an inheritance or gift (e.g. anticipated succession). This is because the currently still very high real estate prices, also in Munich, indirectly cause a considerable increase in gift tax and inheritance tax on real estate.

Why was the Valuation Act amended?

In amending the Valuation Act as of 01.01.2009, the legislator implemented the requirement of the Federal Constitutional Court from 2006. In doing so, it made use of the regulations of the Valuation Ordinance. After this Valuation Ordinance of May 19, 2010 was revised by law of November 26, 2019, the Valuation Act also had to be adjusted to reflect these changes. This adjustment was made as part of the annual tax law and has been valid since 01.01.2023. The legislator had apparently not realized that for some properties the valuation will change extremely upwards. Even dissenting votes in the decision by the Bundesrat could not stop these changes.

High market values ensure high inheritance and gift taxes

In purely formal terms, the legislator has thus stuck to its promise not to increase these taxes. After all, the inheritance and gift tax rates have remained the same.

Since the adjustment of the valuation law to 01.01.2009 to the market value, however, the real estate value has increased immensely and thus also the inheritance tax and gift tax.

This considerable additional tax burden has increasingly led to the sale of real estate in recent years. Especially in the case of real estate that has been owned by the family for a long time and to which hearts and memories are attached, such an indirectly forced purchase is certainly painful for many owners.

The law change of the evaluation law, which took place now with the annual tax law, will affect the different procedures likewise increasing. The question arises: What has changed in the Valuation Act that has led to this result?

1. Changes in the capitalized earnings method

When determining the value of multi-family houses and commercial properties using the income capitalization approach, the changes will have an impact in two areas:

Different calculation of the building income value

When determining the value using the capitalized earnings method, the property value is made up of the sum of the land value and the building income value. The land value, in turn, is calculated on the basis of the applicable standard land values.

However, the current amendment to the law has resulted in changes in the determination of the building income value: In future, the management costs will be deducted in accordance with Annex 23 of the Valuation Act on the basis of the rents achieved or the rents customary in the locality when determining the building income. It is no longer possible to use a lump sum for the management costs, as was the case in the past.

Attention! The recalculation of management costs will generally lead to deviations from the previous building valuation. How exactly the deviations turn out, however, must be calculated in each individual case.

Real estate interest rate

In addition, the calculation of the value-reducing land value interest by means of the property interest rate has been adjusted. If no published real estate interest rates are available from the local appraisal committees, the flat interest rates of the Valuation Act will be applied in the future. And it is precisely these interest rates that have been significantly reduced for valuation dates from 01.01.2023. Thus, the reduction for

• Residential rental properties from the previous 5% to 3.5%
• for mixed-use properties with a commercial share of up to 50% from previously 5.5% to 4.5%, and with a commercial share of over 50% from 6% to 5%
• for commercial properties from 6.5% to 6%.

As a result, the value-reducing land value interest rate is lower than before and thus the building income value is higher than in the previous calculation.

Tip: The previous property interest rates in Munich were in any case far below the statutory interest rates of the Valuation Act. In this respect, the adjustment of the statutory property interest rate will not have a negative impact on buildings in Munich. This can also apply in other cities and regions!

2. Effects of the amendment to the law on the asset value method

If the property valuation is not carried out using the comparative value method or the capitalized earnings value method, the so-called asset value method is applied. Here, too, the amendment to the Valuation Act has resulted in new developments.

Attention! If the asset value method is used, the risk of an increase in the value of the property is the greatest.

When determining the real estate value using the asset value method, the real estate value consists of the sum of the standard land value and the real building value. The real building value is in turn measured on the basis of flat-rate standard production costs, from which a reduction in age value is deducted.

Two aspects are of particular importance in this context:

• The first noticeable change relates to the determination of the standard production costs: Depending on the type of building and equipment, flat-rate production costs from 2010 are specified. These were and are adjusted with the help of annually recalculated construction price indices. The new provisions in the Valuation Act now provide for an additional adjustment to regional construction price ratios as of January 1, 2023, with the aid of the regional factors used by the expert committees. For the urban area of Munich, this regional factor amounts to 1.558.
• In addition, the increase in the so-called value factor will presumably contribute significantly to the increase in values when determining values for tax purposes. This is because the provisional asset value is multiplied by a value figure in order to adjust the value to the “fair market value”. In particular, factors for tangible assets determined by local appraisal committees must be taken into account. If no such local real value factors exist, the value figures of the Valuation Act apply. These have been adjusted upwards by up to 40% in some cases as of 01.01.2023.

Tip! Especially in the case of already high standard land values, such a blanket property valuation can only be countered with an individual expert opinion. Incidentally, it can only be hoped that the responsible local appraisal committees will determine realistic factors of their own that will lead to a realistic approximation of the fair market value in the asset value procedure.

In addition: Extension of the total useful life of real estate.

A final change introduced by the Valuation Act concerns the total economic life of a building. This value is also included in the determination of value in both the income approach and the asset approach. For owner-occupied apartments, rented residential properties or one/two-family houses, a flat-rate total economic useful life of 70 years previously applied, which has now been increased to 80 years by the Valuation Act. This also has the effect of increasing the taxable real estate values.

Important! Planning real estate transfers in 2023 in good time can still save taxes!

Many real estate owners have taken the impending change in the law as an opportunity to transfer real estate by gift until December 31, 2022.

Those who missed this deadline or had to let it pass can still take action now to avoid further increases in value – and thus save taxes!

It is true that the new regulations of the Valuation Act are now already in force and are thus inevitably to be applied when assessing a future tax burden.

However, the topic of “standard land values” holds potential for savings. This is because standard land values play an important role in all calculation procedures when calculating property values.

These standard land values are recalculated and published on a rotational basis, soon again on January 1, 2024. It is not possible to predict whether the standard land values will rise as they have in recent years – and thus also the tax values. The likewise increased credit interest rates will certainly lead to a weakening of the real estate demand and thus also the real estate values. Nevertheless, you should consider transferring real estate in good time.

Tip: This applies above all to the transfer of real estate property by way of anticipated succession. Only those who think about this in good time during the year and plan and implement the transfer of real estate property in good time with professional legal support can approach the transfer carefully, in a structured manner and exactly according to their own ideas – and therefore also avoid future disputes.

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