The tax valuation of real estate significantly determines the amount of inheritance and gift tax, real estate transfer tax and property tax. Learn which valuation methods the BewG provides, when a valuation report pays off and which recent BFH rulings are changing valuation practice.
Property Valuation for Tax Purposes: Methods and Recent Case Law
The valuation of real estate is among the most complex and economically significant questions in tax law. The assessed property value determined by the tax office forms the basis for inheritance and gift tax, real estate transfer tax on certain transactions and the reformed property tax (Grundsteuer). Since the reform of the Valuation Act (BewG) through the Annual Tax Act 2022, the valuation rules have changed fundamentally -- with sometimes considerable consequences for the tax burden. For property owners, heirs and their advisors, it is therefore essential to understand the current valuation methods and to know the available options for influencing the assessment.
Fundamentals of Tax Property Valuation
Valuation Trigger and Reference Date
A tax property valuation is triggered by a valuation event -- typically the death of the testator (inheritance tax), a gift (gift tax) or certain property transactions (real estate transfer tax). The decisive point is the valuation date, at which all value-relevant circumstances are determined.
The Valuation Act as the Framework
The Valuation Act (BewG) governs the tax valuation of real property in sections 176 to 198. It distinguishes between:
- Undeveloped land (section 178 BewG): valued on the basis of the standard land value (Bodenrichtwert)
- Developed land (sections 182 et seq. BewG): valued according to the type of property using the comparison approach, the income approach or the cost approach
The classification into a property type (section 181 BewG) determines which valuation method applies.
The Three Valuation Methods in Detail
The Comparison Approach (Section 183 BewG)
The comparison approach is the primary method for valuing condominiums, partial ownership and single-family and two-family houses where comparison prices or comparison factors are available.
How it works:
- The expert committees for property values derive comparison factors from actual purchase prices
- These factors are applied to the property being valued
- Deviations in location, condition and amenities are reflected through adjustments
Advantages: The method generally produces market-oriented results as it is based directly on actual transactions.
Limitations: In rural areas or for atypical properties, sufficient comparison data are often lacking.
The Income Approach (Sections 184-188 BewG)
The income approach is primarily applied to rental residential properties, commercial properties and mixed-use properties. It focuses on the sustainable income the property generates.
Calculation steps:
- Gross income: Determined on the basis of the market rent (not the actual rent but the average published by the expert committee)
- Net income of the property: Gross income less management costs (flat-rate allowances under Annex 23 BewG)
- Ground rent charge: The imputed return on the land value (standard land value × property yield rate) is deducted
- Building income value: The remaining building net income is capitalised using the multiplier (based on remaining useful life and property yield rate)
- Income value: Building income value plus land value
Key parameters:
- Property yield rate (Liegenschaftszinssatz): Published by the expert committee, this rate reflects the market-standard return expectation and is arguably the single most influential parameter
- Remaining useful life: Determines the remaining economic life of the building
- Management costs: The flat-rate BewG figures frequently fall below actual costs, which can lead to overvaluation
The Cost Approach (Sections 189-191 BewG)
The cost approach applies where neither comparison values nor income values can be reliably determined.
Calculation steps:
- Land value: Standard land value multiplied by the plot area
- Building cost value: Standard construction costs × gross floor area × regionalisation factor × age depreciation
- Preliminary cost value: Sum of land value and building cost value
- Cost value: Preliminary cost value multiplied by the cost value factor (published by the expert committee to align the preliminary value with market levels)
Changes since the JStG 2022:
- Standard construction costs were significantly increased
- The total useful life for residential buildings was extended from 70 to 80 years
- The cost value factors were recalibrated
Proof of a Lower Market Value (Section 198 BewG)
The Opening Clause
Section 198 BewG gives the taxpayer the option of proving a lower fair market value where the value determined under the standardised valuation methods exceeds the actual market value. This opening clause is of great practical importance.
Proof by Valuation Report
Proof is typically provided through a report by a publicly appointed and sworn expert or an expert certified under DIN EN ISO/IEC 17024. The report must:
- Determine the market value in accordance with the Property Valuation Ordinance (ImmoWertV)
- Be prepared as at the valuation date
- Take account of all value-relevant circumstances
- Be comprehensible and plausible
Proof by Contemporaneous Purchase Price
Alternatively, a lower market value may be proved by a contemporaneous purchase price achieved at arm's length. The BFH has clarified that a price achieved within one year before or after the valuation date is generally suitable evidence, provided no extraordinary circumstances apply.
When Is a Valuation Report Worthwhile?
A report is particularly cost-effective where:
- The property has significant defects (maintenance backlog, structural damage, contamination)
- Actual rental income falls substantially below the published market rent
- The property is encumbered by public law restrictions (listed building status, building encumbrances, use restrictions)
- The land value is disproportionately high
- The remaining useful life is overstated by the BewG
Recent BFH Case Law
Proof of a Lower Market Value
The Federal Fiscal Court (BFH) has clarified the requirements in several recent decisions:
- BFH II R 35/23: An expert report is only suitable evidence if it fully meets the ImmoWertV requirements. A report that fails to derive key factors comprehensibly is disregarded.
- BFH II R 12/22: A contemporaneous purchase price is generally suitable evidence, but must stem from an arm's-length transaction free of unusual circumstances.
- BFH II R 7/23: The BFH refined the principles for allocating the total value between leasehold rights and leasehold land.
Property Yield Rates and Expert Committees
- BFH II R 15/22: The property yield rates published by expert committees are in principle binding and cannot be replaced by the taxpayer's own calculations.
- BFH II R 29/22: Expert committees are obliged to update their data regularly. Outdated standard land values or yield rates may be challenged.
Property Tax Reform and Valuation
The property tax reform has triggered a flood of objections and litigation. Initial fiscal court rulings are addressing whether the standardised valuation rules are compatible with the principle of equality (Article 3 of the Basic Law). The Federal Constitutional Court is expected to deliver a definitive ruling in the coming years.
Structuring Options in Practice
Optimising Valuation Parameters
Taxpayers and their advisors should critically examine the individual parameters:
- Standard land value: Is the applied land value appropriate for the specific property?
- Remaining useful life: Can this be influenced by demonstrating modernisation or, conversely, poor building condition?
- Rent level: Is the actual rent below the market rent?
Pre-Transfer Structuring
For planned gifts or anticipated succession, various structures can reduce the tax burden:
- Usufruct arrangement: Encumbering with a usufruct right significantly reduces the taxable value
- Staged transfers: Utilising the personal allowances (section 16 ErbStG) every ten years enables tax-efficient transfers of larger assets
- Family home exemption: Tax-free transfer of the family home to a spouse or to children (up to 200 m²)
- Letting discount: A 10 per cent valuation discount applies to let residential property (section 13d ErbStG)
Conclusion
Following the reform through the Annual Tax Act 2022, tax property valuation has become more complex and in many cases more burdensome. It is all the more important not to accept the tax office's valuation uncritically but to make full use of the options available. The compleneo team advises you comprehensively on all questions of tax property valuation -- from reviewing the assessed value notice through commissioning expert reports to structuring tax-efficient property transfers within succession planning.
