In its ruling of 10 April 2018, the Federal Constitutional Court declared the way in which properties are valued for the purposes of real property tax to be unconstitutional. Up until now, the tax has been calculated on the basis of property values that are decades old (known as “assessed values”). In the states ( Länder ) of former West Germany, the assessed values date from 1964. In the Länder of former East Germany, the values are even older, based on assessments made in 1935.

Since then, property values have increased at very different rates, both in western and in eastern Germany. This leads to significant inequality of tax treatment, which the Federal Constitutional Court considers to be unjustifiable. The amount of real property tax due on properties of a similar value within the same local authority can vary enormously. Figure 1 illustrates this using real examples.

Property tax liability for comparable properties in different locations BildVergroessern
Figure 1 Source:  Federal Ministry of Finance

In other words, the current valuation rules result in similar properties being treated differently without good reason, which goes against the constitutional principle of equal treatment. However, instead of declaring the current valuation rules void, the Federal Constitutional Court gave lawmakers until 31 December 2019 to come up with a new approach. Until then, the existing rules can continue to be applied. If the legislature is able to adopt new rules by 31 December 2019, real property tax can be levied using the current valuation method for an interim period lasting until 31 December 2024. From 1 January 2025 onwards, the new rules must be applied.

The need to reform real property tax law, especially the use of assessed values, has been undisputed for years. In their coalition agreement for the 19th legislative term, the governing coalition parties agreed to place real property tax on a firm foundation, observing the requirements of the Federal Constitutional Court. Real property tax will remain a key source of revenue for the local authorities, bringing in more than 14 billion (in 2018), and the local authorities will retain the right to apply a multiplier.

Real property tax revenue between 2009 and 2018

Tabelle vergrößern
Table 1

In order to be able to meet the deadlines set by the Federal Constitutional Court, the Federal Minister of Finance initiated talks with the Länder finance ministers at an early stage. Any reform of real property tax (and of the associated valuation rules) has to be approved by the Länder in the Bundesrat. After all, the Länder have administrative responsibility for real property tax and will have to do most of the work involved in implementing the new legislation – they will be responsible for revaluing all 36 million or so properties in Germany. In other words, a reform is impossible without the cooperation of the Länder . During these talks, the framework of the real property tax reform was discussed with the Länder , and a compromise was found. Key elements of a real property tax reform were formulated. Based on these and on the subsequent interministerial coordination, the Federal Ministry of Finance produced three draft pieces of legislation. One amends the Basic Law (Germany’s constitution), the second primarily sets out the new rules on the valuation of property for the purpose of real property tax, and the third introduces a third category of real property tax (“real property tax C”). The three drafts were subsequently adopted by the cabinet and submitted to the legislative procedure. In parallel, the CDU/CSU and SPD parliamentary groups presented the same drafts to the Bundestag.1

The objective of the reform is to make real property tax fair, easy to administer and compatible with the constitution in order to ensure that it remains one of the local authorities’ main sources of revenue. The way property is valued for the purposes of real property tax will be future-proofed and put on a stronger legal footing. Increasing the amount of revenue generated from real property tax at the general-government level is not the objective.

The real property tax reform consists of three separate bills

Three bills have been submitted to the legislative procedure to implement the real property tax reform.

  • Draft Act Amending the Basic Law (Articles 72, 105 and 125b)2
  • Draft Act Reforming Real Property Tax and Valuation Legislation (Real Property Tax Reform Act)3
  • Draft Act Amending the Real Property Tax Act for the Purpose of Mobilising Properties that are Ready for Development4

Amendment of the Basic Law and escape clause for the Länder

The German Federal Ministry of Finance and nearly all the Länder agreed on a value-based real property tax model at an early stage. However, since there is no academic consensus regarding the Federation’s legislative powers on real property tax, these powers are to be explicitly enshrined in the Basic Law. This amendment to the Basic Law will give the Federation unrestricted concurrent legislative powers in the area of real property tax, regardless of whether federal legislation is necessary under section 72 (2) of the Basic Law. At the same time, supplementary rules to the Basic Law will give the Länder comprehensive divergent regulatory powers. This means that federal legislation on real property tax will apply to everyone living in Germany, unless a Land has made use of the escape clause.

New rules on valuation for the purposes of real property tax

Basic structure to remain unchanged

Fundamentally, the way in which real property tax is calculated will remain the same. As is currently the case, the calculation will consist of three steps. First, real property (farm and forestry assets and land assets) located in Germany is assigned a value for real property tax purposes. Then, this value is multiplied by a uniform factor (known as the basic federal rate, or Steuermesszahl). Finally, what is known as the multiplier (Hebesatz) is applied. While the basic federal rate is set by federal law and is the same across all of Germany, the multiplier – and therefore the amount of tax ultimately due – is determined by the local authorities.

Graphic shows steps in calculating real property tax BildVergroessern
Figure 2 Source:  Federal Ministry of Finance

Revenue neutrality

The real property tax reform does not have the objective of changing the total amount of tax generated. However, the basic federal rate is the only instrument available to lawmakers at the federal level to ensure that total real property tax revenue remains unchanged across Germany. Because property values have increased over time in most places, revenue neutrality could only be achieved by reducing the basic federal rate to roughly one tenth of its former level. The real property tax bill is ultimately determined by the multipliers applied by the local authorities. The local authorities are encouraged to adjust their multipliers depending on the change in the base tax volume attributable to them. Thus the new real property tax legislation will allow local authorities to retain their revenues from real property tax, but will not increase the burden on taxpayers overall.

However, although the reform will be revenue-neutral, meaning that the tax burden on taxpayers as a whole will neither increase nor decrease, the amount paid by individual taxpayers will change. Some will have to pay more real property tax, others less. That is the logical outcome of the Federal Constitutional Court’s ruling, which, after all, calls for the abolishment of inequalities arising from the use of obsolete property values. Any alternative way of implementing the Federal Constitutional Court’s ruling would also entail changes to individual taxation levels.

It is not possible to provide general information on how individual tax bills will change, particularly since current tax amounts vary significantly. Figure 3 illustrates how real property tax could change in the case of three properties in Dresden – both with and without the multiplier adjustment that local authorities have agreed to make.

Graphic of the property tax with a comparison to the old and new rules. BildVergroessern
Figure 3 Source:  Federal Ministry of Finance

Socially equitable

The real property tax reform will be socially equitable. The amount of real property tax will continue to be based on a property’s value. This means that the amount of tax will vary depending on whether the property is in a highly desirable city centre location or in a less sought-after peripheral district, whether it is the site of a business in a structurally weak region or in a large metropolitan area. Social housing properties as well as land assets belonging to local/community housing corporations or housing cooperatives can, under certain conditions, be eligible for a reduced basic federal rate, on the basis that these properties are rented out not primarily for profit, but for the purpose of providing affordable housing.

Valuation of land assets

The valuation of land assets depends on the property type. Distinctions are made between developed and undeveloped properties and, within the former category, between residential and non-residential properties.

Residential and non-residential property

The category of residential property includes detached and semi-detached houses, blocks of (rental) flats and owner-occupied flats. The category of non-residential property includes business premises, mixed-use properties (serving both residential and non-residential purposes), non-residential parts of otherwise residential properties, and other developed properties (such as club houses or boathouses).

Valuation of undeveloped property

The value of undeveloped property is calculated by multiplying the size of the property by the standard ground value. The standard ground values for 15 of the 16 Länder can be found online via the BORIS portal5 . Users can enter the property’s address and obtain the applicable standard ground value. The amount of real property tax resulting from this calculation reflects the location-based value of the property in a standardised, comparable and realistic way.

Standard ground values

Standard ground values express the average locational value of the land in euros per unit area. Standard ground values are derived by independent expert committees from purchase prices of comparable properties.

Valuation of developed properties using the income approach (Ertragswertverfahren)

The valuation of residential properties is done using the income approach. With approximately 24 million units, residential properties account for the lion’s share of the properties that need to be revalued.

Income approach

Under the income approach, the property’s value is determined by the future income that can be generated from it on a sustainable basis. To give future income a present value, it is discounted at what is known as the property interest rate. The sum of the discounted income is the income value. Arithmetically, the same result can be obtained by applying a capitalisation factor on the annual income from the property over its remaining useful life and discounting the remaining value of the land after the remaining useful life of the building has expired.

In order to make the valuation of such a huge number of properties manageable for all administrations involved, the calculation will be based not on the income actually agreed, but on average monthly net rents per square metre of living space. In other words, a standardised version of the income approach will be used. The specific amount of the net rent depends on the size of the home, the year of construction, and the Land in which the property is located. This amount is then increased or decreased based on what are known as rent level categories, which differ according to local authority (the lower the rent level, the lower the net rent in any given local authority). The German Finance Ministry determines the net rents for each Land using Federal Statistical Office data on average rents in all 16 Länder . It classifies local authorities into rent level categories on the basis of the Housing Benefits Ordinance (Wohngeldverordnung). The value of the land is calculated by multiplying the size of the property by the standard ground value (the same calculation that is done in the case of undeveloped properties) and then discounting the resulting figure with a factor based on the remaining useful life of the building.

Property tax of a family house under new legislation BildVergroessern
Figure 4

Valuation of developed properties using the cost approach (Sachwertverfahren)

The cost approach is used for the valuation of all non-residential properties. In the case of non-residential properties, there is no comprehensive data available to determine average net rents. As a result, the income approach is not an option.

Cost approach

Under the cost approach, properties are valued using the acquisition or construction costs at the time of valuation. The value of the property is made up of the cost of acquiring the land and the cost of constructing the building, minus any depreciation.

Here, too, a standardised version of the cost approach is used for the purposes of real property tax. In other words, rather than the acquisition or construction costs for each individual property, the method applies, on the one hand, average construction costs depending on the type of building minus depreciation and, on the other hand, average acquisition costs for the ground based on standard ground values (as with undeveloped properties). The value of the building and the value of the land are added together, and a factor is applied to adjust this to the general values on the property market. The result is the real property tax amount based on the standardised cost approach.

Valuation of farm and forestry assets

Farm and forestry assets are valued using a standardised income approach. The usual categories of agricultural and forestry use (agriculture, forestry, viniculture and horticulture) are assigned different amounts per unit area. These amounts reflect the average income per unit area for the category in question. Multiplied by the property’s useful area, this gives the net income of the agricultural and forestry use. A capitalisation factor is then applied to the sum of all net income calculated in this way. The result is the value of the agricultural or forestry operation for real property tax purposes.

Straightforward for individuals, businesses and administration

The use of a standardised approach simplifies the process significantly and allows for computer-assisted valuation. In future, the amount of external data required to calculate real property tax will be reduced, and the details required will be relatively easy to obtain. In the case of residential properties, the details required generally include property size, standard ground value, building type, construction date, and living space. The current method requires significantly more information.

In the case of non-residential properties, which will be valued using the cost approach, taxpayers will generally have to provide a maximum of eight pieces of information, down from more than thirty. Thanks to the increased use of digital technologies, the collection of real property tax will be automated to a great extent.

Real property tax C

There is a significant housing shortage in Germany, especially in metropolitan areas. The associated rise in property prices is increasingly driving investors to hold undeveloped properties for speculative purposes. In some cases, undeveloped properties are purchased with the sole intention of waiting until their value goes up and they can be sold at a profit. This kind of building land speculation is an obstacle to the construction of urgently needed housing. For this reason, the German cabinet has decided to give local authorities the ability to encourage construction through tax measures. The relevant piece of legislation (Draft Act Amending the Real Property Tax Act for the Purpose of Mobilising Properties that are Ready for Development) gives local authorities the option of applying a higher multiplier in the case of undeveloped properties that are suitable for development. In effect, real property tax C makes speculation more expensive and creates incentives to actually build on undeveloped land.

Real property tax C

“Real property tax A”, “real property tax B” and “real property tax C” have become established terms for real property tax relating to different types of property assets. Real property tax A refers to real property tax for farm and forestry assets. Property tax B is real property tax for other land assets, i.e. undeveloped and developed properties. Property tax C is the increased real property tax for undeveloped properties that are ready for development.


With its ruling of 10 April 2018, the Federal Constitutional Court set the legislature and the implementing Länder and local authorities a Herculean task. The German government has reached a milestone in implementing this decision by submitting three draft pieces of legislation to the legislative procedure. As a result, the end-of-year deadline set by the Federal Constitutional Court is still achievable. The government has thus paved the way for a real property tax model that is simple, socially equitable and compatible with the constitution.


Bundestag printed papers 19/11084, 19/11085 and 19/11086.
Gesetz zur Änderung des Grundgesetzes (in German)
Grundsteuer-Reformgesetz (in German)
Gesetz zur Änderung des Grundsteuergesetzes zur Mobilisierung von baureifen Grundstücken für die Bebauung (in German)
E.g. for North Rhine-Westphalia: (in German)