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With the implementation of Germany’s property tax reform just weeks away, property owners and municipalities brace for what promises to be a seismic shift in the country’s taxation landscape. The new Grundsteuer, set to take effect on January 1, 2025, is designed to address long-standing inequities and outdated valuation methods. Yet, as the deadline approaches, fears are mounting that the reform may do more harm than good for many of those affected.
The reform stems from a 2018 ruling by the Federal Constitutional Court, which deemed the previous property tax system unconstitutional due to its reliance on antiquated property values from 1935 (East Germany) and 1964 (West Germany). The new system recalculates property taxes based on modern property values, with municipalities tasked with adjusting their local assessment rates to maintain revenue neutrality.
Despite assurances, the promise of neutrality is facing significant challenges. A recent EY analysis reveals a stark trend: more than a quarter of German municipalities have already raised their assessment rates in anticipation of the reform. This "wave of tax increases," as described by EY expert Heinrich Fleischer, is unlikely to subside, particularly given the financial pressures municipalities face.
A Patchwork of Winners and Losers
The uneven impact of the Grundsteuerreform is already becoming apparent. In cities like Berlin, where the assessment rate has been cut drastically from 810% to 470%, some property owners will benefit. For example, a large condominium in Berlin’s Pankow district is expected to see property tax drop from €240 to €200 annually. However, single-family homeowners on large plots in affluent neighborhoods like Steglitz could face increases of up to 70%.
This disparity is echoed nationwide. In North Rhine-Westphalia, the average assessment rate has climbed to 632%, the highest of any federal state, while regions like Bavaria maintain comparatively low rates averaging 355%. For professional landlords and investors, properties with high-density developments on smaller plots generally fare better under the reform, while sprawling properties face heavier burdens.
A recent DIHK survey highlights the sharpest rise in the so-called property tax B rates in a decade, with the national average increasing from 554% to 568% in 2024. Some municipalities, such as Niederkassel and Rheinberg in North Rhine-Westphalia, have implemented staggering increases of 410 percentage points, pushing rates above 1,000%.
Such drastic adjustments are attributed to three key factors:
- Municipal financial pressures: Many cities are required to close budget gaps by raising tax revenues.
- Changes in financial equalization systems: Federal and state-level adjustments have pushed some municipalities to align with higher benchmarks.
- Reform-related recalibration: Municipalities are safeguarding against revenue shortfalls as the new tax model comes into force.
Implications for Tenants and Investors
The reform’s impact extends beyond property owners, as landlords are permitted to pass property tax costs onto tenants. With rents already high in urban centers, this added burden could exacerbate affordability issues. Tenant associations warn that the reform may unfairly shift the financial strain onto renters in tight housing markets.
For investors, the stakes are equally high. Navigating the patchwork of state-specific valuation models is a formidable challenge. Eleven federal states, including Berlin, adhere to the federal model, which considers both land and building values. Others, such as Baden-Württemberg, rely solely on land values, potentially leading to surprising disparities.
Berlin-based tax consultant Patrick Straßer emphasizes the need for vigilance: “For high-value properties or those with unique circumstances, engaging experts to verify tax valuations may prove crucial.” However, with expert opinions costing between €800 and €2,000, property owners must weigh the potential savings against the cost of such challenges.
Critics argue that the reform has given municipalities an opportunity to increase revenues under the guise of "revenue neutrality." While some, like Berlin, have reduced assessment rates to mitigate tax hikes, the majority have taken the opposite approach. In 2023, 2,671 municipalities raised their rates—more than double the number in 2022—while only 49 reduced them.
This trend has heightened concerns that the reform will deepen inequalities rather than resolve them. Haus & Grund, a prominent property owners’ association, warns that the system could disproportionately burden single-family homeowners while benefiting high-density developments.
Potential legal challenges ahead
As the January 2025 implementation looms, the Grundsteuerreform remains a source of uncertainty for all stakeholders. The Federal Fiscal Court’s recent rulings, allowing property owners to challenge valuations exceeding market value by 40%, add a layer of complexity to an already contentious process.
REFIRE can only advise property owners and investors to act proactively, in their own interests:
- Monitor local assessment rates: Variations across municipalities could significantly impact tax bills.
- Engage experts for complex valuations: For high-value properties, obtaining a second opinion may be worthwhile.
- Stay informed on legal recourse: Challenges to overvaluations could offer relief but require careful planning.
For municipalities, the reform is a double-edged sword: an opportunity to modernize an outdated system, but also a potential flashpoint for political and economic tensions. As the dust settles, the success of the Grundsteuerreform will depend on whether its promise of fairness can withstand the realities of implementation. While the reform aims to correct decades of inequity, its success—or failure—will ultimately hinge on the delicate balance between municipal revenue needs and taxpayer fairness.
