What's the property tax?
The property tax is a tax on the ownership of land, also called land tax. It is a tax on substance, which is levied by municipalities and cities on agricultural, commercial and residential land. Among other things, it also applies to heritable leasehold rights.
How does the property tax affect an investment?
Land and property owners who rent out a plot of land or a house pass on the land tax to the tenants and therefore generally do not suffer any financial disadvantages from this tax.
Who has to pay property tax?
Property tax is paid by the owner of the property entered in the land register. It is allocated to the operating costs of a property and is assessed in the tax return if income from renting and leasing is generated with the property. If the property is rented or leased, the advance payment of property tax may also be passed on to the tenant.
Who receives the property tax?
Real estate tax is a purely municipal tax without any apportionment to the state or federal government. This is why the revenue from property tax is so important for the municipalities. In Germany, cities and municipalities have collected more than 14 billion euros in taxes from property tax in 2019 alone.
What is the difference between property tax and land transfer tax?
The land transfer tax is only paid once by the buyer when purchasing a property. The property tax, on the other hand, is paid by the owner to the municipality every year for the entire period of his ownership.
How is the property tax calculated?
For the calculation of property tax B, the so-called unit value for the property is first determined by the relevant tax office. Decisive for the amount of the value is whether the property is developed or undeveloped. The value is the basis of assessment for the property tax. The unit value is calculated on the basis of the value of the property in 1935 (West German states) and 1964 (East German states). As prices have changed since then, the unit values determined are often lower than the real market values of the properties. The unit value for an undeveloped plot of land can be determined in a fairly straightforward manner. The number of square metres of the property is multiplied by the corresponding land value from 1964 or 1935. It becomes more difficult if the property is developed. The tax offices then use either the earnings value or the real value method for calculation:
Earnings value method
In accordance with the earnings value method, the tax offices generally value single and two-family houses, condominiums or mixed-use properties. To do so, they multiply the annual rent that a tenant would have to pay for an entire year in 1964 or 1935 by a multiplier. This multiplier takes into account factors that reduce or increase the value of the property, such as the size and fittings of the house.
Real value method
The real value method has proven to be effective in those cases in which the annual raw rent for 1935 or 1964 cannot be determined. The real value method adds up the values of the land, building and outdoor facilities, whereby the value of the building is calculated from the average production costs on January 1, 1964 or January 1, 1935.
What is the property tax rate?
The property tax rate is required to calculate the amount of property tax. This factor is multiplied by what is known as the property tax assessment rate to determine the amount of property tax. The property tax assessment is calculated from the unit value of a property. The unit value, in turn, is calculated using the earnings value method (how much income does the property generate when it is rented out?) or the real value method (how much are the construction costs and fittings, how is the house equipped?).
The formula for the calculation is:
Unit value x property tax amount x rate of assessment = property tax
The property tax rate varies from region to region. The local authorities set it anew every year in accordance with § 25 of the Land Tax Act. The maximum amount of the assessment rate is at 500 percent.
What is property tax A and B?
Property tax in Germany is divided into property tax A and B. The A stands for "agrarisch" (agrarian) the B stands for "baulich" (structural). Property tax A is levied on agricultural and forestry property. Land that can be built on or that is already built on is subject to land tax B. Buildings and apartments are also subject to property tax B.
Current case law on property tax
In 2018, the Federal Constitutional Court in Germany dealt with two constitutional complaints. The determination of the unit values necessary for the calculation of the real estate tax was declared unconstitutional. These were outdated and would not allow equal treatment. The judges objected to the considerable distortion of the values and called for a reform. According to current law, the old regulation may only be applied until 31 December 2024. About 35 million properties are affected.