Is it advantageous to transfer real estate before the end of the year?
The Annual Tax Act 2022 contains numerous adjustments which will have a severe impact on many real estate valuations from 2023 onwards. The legislator has included this, somewhat hidden away, in the Annual Tax Act 2022, while the effects of the changes are not necessarily obvious at first glance.
The tax law firm Alexia Huber & Partner Steuerberatungsgesellschaft mbB advises clients in advance on the transfer of real estate and provides initial estimates of the tax value of real estate to be transferred. In addition, the firm supports clients in the preparation of inheritance and gift tax returns and in the separate determination of property values.
In particular, the capitalized earnings value method and the asset value method will be particularly affected by the future revision of the German Assessment Act (Bewertungsgesetz). The valuation procedure will be adapted to the current Real Estate Assessment Regulation.
The modifications to the German Assessment Act (Bewertungsgesetz) will primarily result in higher real estate values for tax purposes in the future. It should therefore be taken into consideration whether real estate transfers planned from 2023 onwards should not be carried out before the turn of the year in order to save inheritance and gift tax or to be able to continue higher tax allowances.
During the course of the property tax reform, standard land values in Bavaria, which are actually only reassessed every two years, were reassessed as of January 1, 2022. A new determination will also be made on December 31, 2022. For transfers in 2022, the standard land values as of 01.01.2022 will still be applied. Rising standard land values are also to be expected from 2023 onwards. The most recent standard land values (prior to the transfer date) are always definitive.
Changes in the capitalized earnings value and asset value methods
The total service period for single-family and two-family houses, rented residential properties, privately used residential property and mixed-use properties is to be increased from 70 to 80 years. In principle, this already increases the value of land in the case of comparatively “new” buildings or buildings that have not yet been “used up” economically, as the reduction due to age is lower. In addition, it remains the case that the remaining useful life of a building that is still usable is at least 30% of the total service life. Exceptions exist only for buildings with existing demolition obligation. This change alone will almost invariably lead to higher property values, as the previously applicable reduction in value due to age will be lower as a result of the newly introduced depreciation factor due to the longer service life.
Changes in the capitalized earnings method
In the capitalized earnings method, the land value interest (depending on the property interest rate) is deducted from the net income from real estate (building value). This was previously fixed in the annexes to the Valuation Act. In the future, this is to be adjusted to the current market level. Up to now, the fixed rates have been relatively static, as a consequence it is often the case that only the land value remains in the evaluation of the property. Any building value (building income) was thus leveled out. In the future, there will be a permanent adjustment to the current market level. The property interest rates determined by the local appraisal committee are to be applied primarily. However, if no suitable property interest rates are determined, the percentages in the Valuation Act will be used instead.
Changes to the asset value method
For tax purposes, a so-called “regional factor” and an “age value reduction factor” are to be introduced in the asset value method, and there is also to be a change in the value factor (adjustment to the market value). Accordingly, the real value of the building is to be determined in accordance with the following scheme:
Standard production costs (§ 190 Para. 1 and 2 BewG in conjunction with Appendix 24, Part II., to the BewG)
X
Gross floor area (§ 190 Abs. 3 S. 2 BewG)
X
Construction price index (§ 190 Abs. 3 S. 2 i.V.m. Abs. 4 BewG)
=
Average construction costs of the building (§ 190 para. 3 BewG)
X
Regional factor (§ 190 para. 3 subpara. 1 in connection with para. 5 BewG)
X
Age reduction factor (§ 190 Abs. 3 S. 1 i.V.m. Abs. 6 BewG)
=
Real building value (§ 190 BewG)
Fazit
Conclusion
The appraisal of real estate for inheritance and gift tax purposes is expected to be adjusted by the Annual Tax Act 2022. Changes will be made primarily to the capitalized earnings value method and the tangible asset value method. As a result of these changes, transfers of real estate are expected to be made with higher (tax) values from 2023 onwards.
In the case of the capitalized earnings value method, this increase will be justified by the higher and permanently adjusted property interest rates in the Valuation Act. Appraisal committees only determine property rates in major cities, which means that the property rates set out in the Valuation Act will continue to be applied in the future. These in turn are now to be adjusted to the market level.
The anticipated increase in the value rates (adjustment of the asset value to the fair market value) will also result in higher property values for the asset value method.
Further changes are also to be made to evaluations for cases of hereditary building rights.
The possibility to prove a lower value according to § 198 BewG shall remain. This means that it will still be possible to prove a lower value by means of a corresponding appraisal by an expert or a purchase price achieved within one year before or after the evaluation date.
The tax law firm Alexia Huber & Partner Steuerberatungsgesellschaft mbB determines the probable tax values for inheritance and gift tax purposes in advance and therefore provides the client with an initial estimate of the probable property value and the resulting tax in advance.