Real estate tax reform

The property tax burden affects both owners and tenants. As early as 2016, property taxes generated well over 13 billion euros for municipalities. The property tax reform was decided upon in June 2016, with Hamburg and Bavaria voting against it. The Federal Constitutional Court now expects a new reform by December 31, 2019, as the current regulations on property tax are considered unconstitutional.

Three models to choose from

Before the reform, a working group was appointed by the finance ministers of the federal states, whose task was to develop various reform approaches. Three models emerged, which were eagerly discussed. The following three models were up for discussion:

• Model 1: The Nordic Model (Valuation based on market value)
• Model 2: The Southern Model (Valuation based on land and building areas)
• Model 3: Thuringian Model (combines Model 1 and 2)

After all three models were tested independently of the economy, it was clear that none of these models were truly usable. Consequently, the models were discarded and an overarching model was developed. On September 23, 2016, the states of Hesse and Lower Saxony submitted the draft bills to the Bundesrat, and they were adopted on November 4, 2016. The Federal Government issued a statement on December 21, 2016. On February 15, 2017, the Finance Committee of the Bundestag resolved that no initiative would be taken as long as the Bundesrat did not show a consensus position. The currently presented model is a cost-value model that includes the overarching model and extensions.

The cost-value model in detail

The so-called cost value is the basis of the cost value model. Accordingly, for unimproved land, the standard land value determined by expert committees is used. The valuation is thus carried out on the basis of the average selling price in a given region. For land that is already developed, the so-called flat-rate building replacement cost is factored into the valuation. The buildings are thus to be valued at a flat rate based on the construction costs incurred. These, in turn, must be regularly updated. The primary criticism of the cost value model includes the regular updating of construction and land costs, which entails a dynamic mechanism for increasing property tax. In addition, new buildings would be fundamentally disadvantaged, which is why this model is to be rejected.

Contact us – we are always available

CONTACT US

Why a new reform of property tax

A new reform had to be created because the current system was deemed unconstitutional. This approach was confirmed by the Federal Constitutional Court in a ruling dated April 10, 2018. According to the ruling, a uniform valuation of real estate has been incompatible with the principle of equality under the Basic Law since 2002. The Federal Constitutional Court further stated that the main valuation date of 1964 leads to massive unequal treatment in the assessment of land and real estate assets. This reasoning by the Federal Constitutional Court declared the regulations unconstitutional and required the legislature to pass new regulations by December 31, 2019. Until then, the currently applicable rules may continue to be applied. Once the new regulations have been enacted, the old regulations may continue to be applied for five years, at the latest until December 31, 2024.

The Southern Model in Focus

For a fair property tax, it is important that the reform can be administered. This would most likely be the case with the Southern European model. Collecting cost or market values would result in considerably greater bureaucratic effort. This would lead to unnecessary complications. A continuously recurring determination of standard values would also have consequences, as administrative resources would be almost unmanageable.

Since the Federal Constitutional Court has set a very short deadline, the "Southern Model" is the only feasible option. The "Cost-Benefit Model," which was introduced by the Federal Council, would require a ten-year transition period, which the Federal Constitutional Court will not grant. The "Southern Model," on the other hand, can be administered more quickly and is significantly less prone to disputes.

The cost-value model should also be rejected because, according to calculations, property tax would increase tenfold. The model is therefore considered socially unacceptable, as officially stated in Hamburg. Only by adjusting the tax assessment figures and multiplier rates could the drastic increase in property tax be prevented.