Property owners are familiar with property tax. This is a tax levied by the municipality. Among other things, it is used to finance public expenditure. However, the calculation was disputed. The Federal Constitutional Court therefore had to rule on its legality. The result is a property tax reform that the federal government and the states have legally set in motion.
The consequence: A recalculation will take place and is to be taken into account when assessing owners from 2025. As early as 2022, all owners of real estate, land and plots as well as leasehold properties were asked to enable the new calculation by providing relevant information.
Info: The exact procedure differs between federal states. Depending on where you live, the key figures may therefore differ from the information provided here.
If you own or wish to acquire a property or land, you are directly affected by property tax. If you are a leaseholder or tenant, you are indirectly affected, as property tax is usually included in operating costs.
What is property tax?
Municipalities are permitted to tax real property. This levy applies to land and buildings. The proceeds are used to finance public projects. The funds remain in the municipality and are available there for the construction and maintenance of infrastructure, public facilities and much more.
Why does the calculation need to be adjusted?
Until now, the calculation has been based on a standard property value and a property tax assessment amount, which is adjusted locally by the multiplier. Various factors, such as the size of the plot, are included in the calculation.
This procedure results in major differences between different locations. In addition, the calculation bases date back to past decades. As a result, the actual value of properties has become decoupled from property tax. Among other reasons, the Federal Constitutional Court classified the previous calculation as unlawful. It considered the principle of equal treatment to have been violated.
When will the new calculation apply?
Municipalities may use the existing data only until the end of 2024. From 2025, property tax must be determined according to new key figures. However, there will continue to be a “patchwork” of different rules. This is because most states have issue general decrees that must be implemented in an adapted manner by the municipalities.
Federal law gives the states a certain degree of freedom in implementation, meaning that differences will continue to be apparent both between the various states and between municipalities. Essentially, the new calculation is based on the size of the property, its type of use, and its location, but also includes further details such as the living space.
How the new property tax is calculated
As before, the formula for calculating the charge is:
Value of the property x tax assessment rate x multiplier
However, the individual factors are based on new data. The following explanations illustrate this.
- Value: When determining the value, the authorities essentially take into account components such as the land value, the area, and the rent level for residential areas or other types of use. The information is based on statistical values from the federal government. There are different gradations for rent levels in order to take regional differences in development into account. This factor alone would generally increase the tax burden.
- Tax assessment rate: The tax assessment rate was previously based on data from the 1960s (West) or the 1930s (East). It will be reduced to around one tenth. There are also further reductions for social housing. This factor alone would generally reduce the tax burden.
- Multiplier: Municipalities are called upon to keep the total property tax revenue as constant as possible. Only insignificant changes are permitted. Municipalities will adjust the multiplier accordingly, taking location and use into account. Nevertheless, as a result of the overall calculation, this factor will mean that some owners pay more and others less.
The new property tax is composed of all three factors. Excluded from this are undeveloped plots in urban areas or regions with a shortage of housing. For these, municipalities may levy higher multipliers in the form of Property Tax C. This is intended to encourage the construction of housing.
Changes also affect commercially used land
The new key figures also apply to commercial properties, leased parcels of land, and areas used for agriculture and forestry. In future, only the owners, not the users (lessees), will be responsible for the charge.
However, there are differences from the standard calculation. For commercial plots and properties, the simplified The property value method is used. In this process, the production costs for the property replace many other detailed pieces of information. The aim is to keep the procedure as streamlined as possible, also because, unlike with private properties, land and buildings are included in the business management calculation.
For agricultural and forestry use, the previous income value method remains the essential basis. However, it is being standardized and simplified.
What data must owners have available?
In practice, this means that from 2022 onward, all existing properties must be reassessed. This mammoth task requires the owners’ assistance. The basis is the Act on the Reform of Property Tax and Valuation Law, which provides for this assistance.
This means: If you own land, plots of land or properties, use land subject to hereditary building rights, or are planning to make a purchase soon, you are obliged to provide information to the tax authorities. They will accordingly request that you submit data. The information required depends on the federal state and municipality. As a rule, this includes the following information:
- exact address/location of the property,
- type of property (construction phase/use),
- extract from the land register (ownership structure, usage rights, parcel data),
- the current property tax assessment notice,
- construction year of the property, if applicable,
- evidence of monument protection, etc.,
- calculation of the land area and of residential and usable floor areas, including the allocation for rented residential properties,
- number of parking spaces, garages and parking lots.
You will find most of the data in your purchase agreement or construction documents. In some cases, additional agreements on usage rights and declarations of partition may be required. Where residential properties are concerned, very detailed information on the apartments and common areas must sometimes be provided.
Where can you find further information?
The federal states provide detailed information on the new property tax. Although the municipalities request the relevant data through the tax authorities, the federal states establish the legal framework. These are based on federal law, but some states have made use of opening clauses. Therefore, individual details may differ in Bavaria from those in North Rhine-Westphalia or Berlin. Further information is available at the following web addresses Information available:
- Baden-Württemberg,
- Bavaria,
- Berlin,
- Brandenburg,
- Bremen,
- Hamburg,
- Hesse,
- Mecklenburg-Western Pomerania,
- Lower Saxony,
- North Rhine-Westphalia,
- Rhineland-Palatinate,
- Saarland,
- Saxony,
- Saxony-Anhalt,
- Schleswig-Holstein,
- Thuringia.
Recalculation will change the tax liability
The property tax reform will significantly change the tax liability. Considerable differences between the new and old property tax amounts are to be expected in some cases.
If you rent out or lease a property, you will be able to pass the amount on to the tenants. The prerequisite is that this item is listed among the operating costs.
As the owner of land used by third parties, you will have to pay the tax yourself in the future. Here too, you can pass it on to the users under appropriate contracts.