Inheritance tax on real estate: tax-free amount and market value

Inheritance tax for real estate in Germany – Who inherits a real estate or also would like to bequeath, which should consider some, also on inheritances taxes are raised in Germany. The amount of the allowance depends on the degree of relationship to the testator. Relevant here is the tax class to which the heir belongs and the tax rate applicable to this tax class. Since 2009, it has been common practice for inherited real estate to have inheritance tax determined according to the market value.

Who belongs to which tax bracket?

Spouses and spouses always belong to tax class I and therefore always have an allowance of up to 500,000 euros. Children and stepchildren as well as grandchildren, parents and forefathers also belong to tax class I. Children enjoy a tax-free allowance of 400,000 euros, grandchildren have a tax-free allowance of 200,000 euros, parents and forefathers have a tax-free allowance of 100,000 euros.

If the inheritance is not a normal inheritance but a gift, parents and forefathers are assigned to tax class II. This reduces the tax-free amount from 100,000 euros to 20,000 euros. In addition, divorced spouses, nephews, nieces, step-partners and siblings also belong to tax class II. All other persons are automatically assigned to tax class III.

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Inheritance tax on real estate: How high is it?

If you want to calculate the inheritance tax when inheriting real estate, you subtract your allowance from the market value of the property and get the taxable amount.

If the amount is 75,000 euros, persons in tax class I must pay 7% inheritance tax. If the heir is in tax class II, the inheritance tax increases to 15% and in class III 30% is due.

If the amount involved is up to 300,000 euros, 11% is due in the case of tax category I. For tax class II, the inheritance tax is already 20%, for tax class III it is 30%.

For an amount up to 600,000 euros, the inheritance tax in class I amounts to 15%, in tax class II 25% is required and in tax class III 30%.

If the amount reaches up to 6,000,000 euros, 19% is due for persons in tax class I, and 30% must be paid for persons in tax classes II and III.

If we speak of an amount up to 13,000,000 Euros, 23% inheritance tax must be paid in the case of tax class I, 35% in the case of tax class II and 50% in the case of class III.

For amounts up to EUR 26,000,000, 27% tax is due for tax class I, 40% for tax class II and 50% for tax class III.

For even higher amounts, the tax rates are 30% for Class I, 43% for Class II and 50% for Class III.

Inheritance tax real estate: When is it due?

In principle, tax liability is due on all inherited assets. In the case of real estate, however, there are exceptions that benefit the heir. For example, taxes are not due if the heir himself lives in the inherited property for ten years.

How can the market value be determined?

The market value of a property reflects the sale value of a property. The valuation takes into account the respective market conditions and several methods are used. The determination of the market value depends on whether the property is traded on a functioning market. This is not the case, for example, in a foreclosure auction, which is why properties can often be acquired for far less than their actual market value. In this case, the market value is below the actual market value.

The procedures by which fair value is determined:

The settlement procedure

The comparison procedure is based on the market value of similar properties that have only recently been sold in a similar location. The basis for this is the purchase price collection of a local appraisal committee of the city. All purchase prices of any real estate are recorded in this collection. This procedure can deliver very good results if a sufficient number of reference values are available.

The capitalised earnings method

This method is often used if the property is a commercial property or if the house is rented out. Here, the market value is calculated from the land value and the building income value. The building income value is made up of the rental income and the costs of management. If the risk of loss of rent is very high or the maintenance costs are immense, the market value may be surprisingly low.

The asset value method

This is the valuation method that is most widely used. In the asset value method, the market value is the sum of the asset value of the building and the land value. The market value is calculated on the basis of the original construction costs, from which the values for signs of wear and tear are deducted. This method is mostly used by banks.

It is not uncommon for appraisers to use two of the methods and then report the average of the two as the fair market value.

There are also other factors that influence the market value of a property.

The market value in turn changes due to supply and demand. The higher the demand for a property, the more the market value of the property increases. Whether the location of a property is in demand can be seen from the standard land value. This is derived from other property sales. If it is a detached property, the year of construction, the living and usable space, the condition of the building and various building features are important in addition to the standard land value.

Anyone who engages two appraisers will notice that the market value can differ from appraiser to appraiser. This shows that there is always a certain amount of room for interpretation when it comes to market value.

How can I find out the contract value of my property?

The first step of owning the property is to hire an appraiser in the first place. If the market value is important for the sale of a property, a free appraisal of a property may already be sufficient. If, on the other hand, it is a matter of divorce or inheritance, a written opinion regarding the market value is usually necessary.

The owner should have the following documents ready for the appraiser:

  • The extract from the land register
  • The floor plans of the house
  • The site plan
  • A living space calculation
  • The energy certificate
  • A description of the building

A professional appraiser is therefore advisable, as it is hardly possible for a private person to determine the real market value alone. Every fourth seller tends to overestimate the value of his property and thus gets in his own way when selling his house. Buyers, on the other hand, are naturally interested in keeping the purchase price as low as possible and therefore focus their attention on defects.

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