The lower the interest rate, the lower the deduction amount
The remaining proceeds determine the expected future income from the property and therefore the capitalized earnings value, which is used for gifts or inheritances for the property. Lower property interest rates therefore lead to higher gift or inheritance taxes.
Here is an example:
In a case recently decided by the Berlin-Brandenburg tax court, a property interest rate of 1.08% led to a property value of around € 5.23 million, while the actual statutory interest rate of 5% would only have led to a value of € 3.88 million. With an inheritance tax rate of 19%, this approximately € 1.35 million higher valuation means an additional tax of around € 270,000.
Which property interest rate is applicable?
The applicable property interest rate is determined by local expert committees on the basis of actual purchase cases in the respective region. However, if there are not enough purchase cases in the region or in certain years, the rates determined by law are to be applied.
This dualism can obviously lead to arbitrary results, depending on the region and year for which gift or inheritance cases are available. Even on the outskirts of cities, there are often not enough comparable cases compared to inner city locations. Properties that are not too far apart are therefore valued completely differently, even though the net rental income may be close to each other.
In Berlin, this has so far been taken to the extreme, as the property interest rates determined by the expert committees are further divided into “general” and “for tax purposes” interest rates. Of all things, the property interest rates determined for tax valuation purposes were recently deemed unsuitable by the Berlin-Brandenburg tax court in a ruling dated April 24, 2024.
Although the tax court did not object to the dualism described above, there are many indications that the previous valuation system is unconstitutional. This is perhaps one of the reasons why the appeal was allowed and it is to be expected that the Federal Fiscal Court will deal with this issue. The valuation of the above-mentioned types of property is currently also suspended by the Berlin tax authorities, also because property interest rates determined by experts were last published in May 2023 for the reference date 30.06.2022.
As an advisor, it is therefore important to take into account the uncertainties of the tax valuation of real estate, to use the scope for valuation and to keep current cases open until the highest court has ruled on this.
As the valuation of real estate is particularly important for proactive succession solutions, the author and his team will be happy to advise and help you in these cases.
Summary of the key facts:
- The valuation of residential, commercial and mixed-use properties is significantly influenced by property interest rates
- Where available, interest rates determined by local expert committees should be used
- However, statutory property interest rates currently lead to significantly lower valuations
