This topic has caused a great deal of uncertainty among property owners in recent months: As a result of the property tax reform, many property owners received higher property tax values than before. Tenants are also concerned about the changed values: as the property tax is also passed on to the rent, they fear an increase in the already rising rents.

To prevent this, politicians are now taking countermeasures. In this blog post we provide information about the property tax, the property tax reform and how the state of Berlin is dealing with hardship cases.

Property tax - what is it anyway?

Property tax is levied on the ownership of land, which includes the buildings on it as well as agricultural and forestry operations. As a rule, the owners are the ones who have to pay this tax. However, if the property is rented out, it is possible for the property tax to be passed on to the tenants via the service charges.

What is financed by property tax?

The revenue from property tax is solely for the benefit of cities and municipalities, amounting to almost 15 billion euros per year. This makes property tax one of the main sources of funding for municipal budgets. Local authorities use these funds to finance public facilities such as schools, daycare centers, swimming pools and libraries. They also enable important investments in local infrastructure, including the construction and maintenance of roads, cycle paths and bridges.

Why was the property tax reformed?

In 2018, the Federal Constitutional Court ruled that the existing valuation system for property tax is unconstitutional because it treats similar properties unequally, which contradicts the principle of equal treatment enshrined in the German Basic Law. The court demanded a new statutory regulation by December 31, 2019 at the latest. However, until the new regulation is implemented, property tax may still be levied according to the old system until December 31, 2024. From January 1, 2025, the tax will be calculated on the basis of the new law. The previous method of calculating property tax is based on outdated property values, the so-called standard values.

For properties in western Germany, these values are based on the year 1964, while values from 1935 are used for the eastern German states. These values are multiplied by a uniform tax base and the assessment rate set by the municipalities. Due to the strong and, depending on the location, varying value development of real estate since these cut-off dates, this leads to unequal tax treatment which, according to the Federal Constitutional Court, is no longer compatible with the Basic Law. The result is that very different property tax amounts can be incurred for similar properties in similar locations.

How is the new property tax calculated?

The new property tax is calculated in a three-step process: It is made up of the value of the property, multiplied by the tax assessment figure and the assessment rate.

The first step is to determine the value of the property tax. Various elements play a role here, including the land value (expressed by the standard land value) and the amount of the net cold rent, which is recorded statistically and depends, among other things, on the rent level in which the municipality is classified (with higher levels tending to mean higher rents). The area and type of property and the age of the building also influence the calculation. Information on the standard land values can be viewed via the standard land value information systems of the respective federal states. The classification of municipalities according to rent levels is carried out by the Federal Ministry of Finance, based on average rent data from the 16 federal states.

The second step involves an adjustment to value increases compared to the values that have not been updated since 1935 or 1964. This will be achieved by significantly reducing the tax base rate - a key component of the property tax calculation - to around one tenth of the previous value, i.e. from 0.35% to 0.031% for residential properties and to 0.034% for commercial properties. In addition, the promotion of social housing as well as communal and cooperative housing through property tax will be continued by giving such housing projects a further 25% discount on the tax assessment figure, which will reduce the tax burden.

The third step involves the municipalities adjusting their assessment rates. If the revaluation changes the property tax revenue in individual municipalities, they can modify their assessment rates in order to ensure that the overall revenue remains the same. The municipalities have declared that they are prepared to adjust their assessment rates accordingly, in particular to avoid significant tax increases that could arise as a result of the legally required reassessment.

What do homeowners and tenants fear?

Although the reform is designed in such a way that the total property tax revenue remains stable - in particular due to the significant reduction in the tax base and the planned adjustment of the assessment rates - this does not mean that the amount of property tax payments will not change for all taxpayers. Some will have to make higher contributions in future, others lower. This necessity results directly from the ruling of the Federal Constitutional Court and is unavoidable due to the current imbalance resulting from the consideration of outdated valuation approaches.

The effects of the reform on the property tax contributions of individual taxpayers cannot be generalized, especially due to the current wide variation in property tax payments. Under the new system, some taxpayers, particularly tenants in large apartment buildings, would be financially better off, while others would have to pay higher property taxes and for some there would only be minor differences.

How is Berlin reacting to the new property tax?

The city of Berlin is the first federal state to announce that it will not be enriched by the property tax reform and plans to almost halve the assessment rate. As Finance Senator Stefan Evers announced in a press release, Berlin has already succeeded in issuing almost all property tax assessment notices. The changes in the property tax burden have been analyzed in detail on this basis and it has been concluded that there is a need for action.

Berlin wants to adjust the measurement figures from 2025 and reduce the collection rate

In its evaluations, Berlin came to the conclusion that the measurement figures specified by the federal legislator would lead to a greater burden on residential properties in the capital. For this reason, the measurement figures for Berlin are to be adjusted so that from 2025 the tax measurement figure will be 0.31 per thousand for residential properties and 0.45 per thousand for non-residential properties and undeveloped land. The assessment rate for property tax for developed and developable properties is to be reduced from the current 810% to 470%.

Hardship clause to protect property owners in Berlin

According to the city, the adjustment of the assessment rate will protect most Berlin property owners from an excessive property tax burden. However, a hardship clause is to be introduced for individual cases in which the new property taxes endanger the owners' existence. For example, it should be possible to reduce the property tax for residential properties that are used by the owner. Anyone wishing to make use of the hardship clause must apply for this and provide evidence that the owner's existence is at risk as a result of the new property tax.