Inheritance tax depends on the market value
In the case of a gift or inheritance, assets are passed from one to the other without consideration. But that doesn’t mean that the beneficiary doesn’t have to pay anyway. Gift or inheritance tax could be due, which goes to the tax office. Whether it is payable depends on the value of the gift or inheritance. In the case of real estate, the market value is decisive. How the value is calculated could change in 2023. A decision is currently being made on the 2022 Annual Tax Act, which provides for significant changes in the valuation of real estate. If these come into force, the result would be that real estate could be valued higher.
The tax office determines the market value in “typical mass procedures” from the desk, i.e. not individually – even if the decisive factor in the evaluation of house and yard is how they are made. Even with undeveloped land, there is a property valuation by the tax office. As a rule, the property is not inspected.
Allowances protect against inheritance tax
For beneficiaries, the value of a gift or inheritance is of great importance. Because gift or inheritance tax is not necessarily due, but only if the additional assets exceed the allowance of the recipient or heir. The allowances depend on the close relationship to the donor or the deceased.
The spouse or registered life partner is entitled to an allowance of 500,000 euros, and it is 400,000 euros for one’s own children. Friends have a significantly lower allowance of 20,000 euros. This also applies to unmarried partners. If the property remains within the family, a completely tax-free transfer is possible.
Tip: More on the subject in our special on inheritance tax: use allowances, save on taxes. See also our tables on personal allowances and tax rates for gift and inheritance tax.
obligation to notify. Inform the tax office within three months if you have received a gift or an inheritance. In the case of donations, this obligation also applies to the donor. The tax office is automatically informed if there is a notarial or court-opened will that shows the relationship between the deceased and the heirs. This also applies if a gift is certified by a court or notary.
Document. The value determined by the tax office is not always correct. If in doubt, you can commission a publicly appointed and sworn expert – before the office becomes active and afterwards. Cost: at least 1,500 euros. Calculate whether this is worthwhile in terms of tax implications. If the market value determined by the tax office is too high, but remains below the allowance, it has no effect on the tax and therefore does not necessarily have to be refuted with the help of an expert opinion.
The tax office determines the market value
As a rule, the tax office determines the market value of a property, although every owner has the opportunity to commission an appraiser. These can be found, for example, via the Chamber of Industry and Commerce, which maintains a nationwide directory of experts. When determining the value of real estate – as with other assets – the market value is decisive. This is the value that could be achieved in a proper sale, i.e. the so-called market value. In the case of donations of real estate, the reference date for the valuation is the date of entry in the land register, in the case of an inheritance the date of death.
An overview of the assessment procedures of the tax office
In order to determine the market value of real estate, the tax office uses three valuation methods: the comparative value method, the income value method and the material value method. Which one is used depends on the type of property and the data available.
comparative value method. It is used, for example, in condominiums and single- and two-family houses. The comparative value is based on purchase prices that were achieved when selling similar properties and land. For example, property size, geographic location, year of construction, living space and equipment are taken into account. The procedure is considered a reliable evaluation method.
income approach. In the capitalized earnings method, the focus is on yields, the remaining economic useful life and the land value. It is used for yield-oriented real estate types, such as multi-family and commercial buildings and commercial real estate.
material value procedure. In the material value method, the substance value and land value are decisive. It is used for real estate where owner-occupation is the priority and where there are no comparable values or usual rents, for example because they are in rural areas or are unusual, such as villas or castles.
With the capitalized earnings method and the real value method, the market adjustment to the local real estate market is important – the tax authorities do not always have this market data available.
Possible changes due to the Annual Tax Act 2022
There could be important changes in 2023, especially in the case of the capitalized earnings method and the real value method, if the Annual Tax Act 2022 were to come into force. This law contains statutory regulations in various areas of tax law. This includes adapting the regulations for real estate valuation for inheritance and gift tax as well as real estate transfer tax. It is to be expected that the new regulations of the Valuation Act will lead to a higher valuation of real estate.
Tax advantages for rented objects
Rented properties are only taken into account at 90 percent of the determined market value when calculating gift or inheritance tax. The remaining 10 percent can be given away tax-free or inherited. The tax exemption applies not only to multi-family houses, but also to rented one- and two-family houses and rented condominiums.
Additional tax benefit: If gift or inheritance tax is payable on rented properties, this can be deferred for a period of ten years if the new owner would have to sell the property in order to be able to pay the tax. The rule protects against distressed sales and gives landlords the opportunity to gradually pay the tax from the rental income.
Valuation by the tax office has weaknesses
The way in which the tax office determines the market value for gifts and inheritance and also for the real estate transfer tax is seen quite critically. Similar objects are grouped and evaluated more or less uniformly. In doing so, there may be a lack of reference to the valuation object and proximity to the market. As a rule, this leads to an increase in the assessment basis, with the result that real estate is often overvalued. However, the fact that tax offices determine a market value that is too high does not necessarily apply everywhere.
Objection to Valuation
No matter how the property was valued – no one has to accept the assessment of the tax office. You have the option of filing an objection to the notice of assessment within one month of delivery and submitting an expert opinion from a publicly appointed and sworn expert that proves a different value. The purchase price achieved is also considered proof of a lower value if a sale takes place within one year of inheritance or donation. The same applies if the property was purchased within a year before the key date.
Market value also important in inheritance disputes
compulsory portion. The value of a property can also play a role in inheritance disputes, for example if a relative has been disinherited. The amount of the compulsory portion is often disputed. This amounts to half of the statutory portion of the inheritance. If a property is in the estate, the claim is also based on its value. The person entitled to a compulsory portion has an interest in the property being awarded the highest possible price. The heir who is supposed to give away something from the estate wants exactly the opposite. The beneficiary of the compulsory portion can request an appraisal, which will be paid for from the estate. If he thinks the report is wrong, he can have another one drawn up. If both parties do not agree, the dispute ends up in court. Another report clarifies the matter.
community of heirs. The value of real estate is also relevant, for example, when there is an inheritance dispute, i.e. the estate is to be divided among the heirs. If the heirs agree on a joint expert, this often saves trouble and money.