How German Property Is Valued for Inheritance and Gift Tax

The comparison method applies to condominiums and to one and two family houses where comparable sales exist, and it is the method closest to a market figure because it is built from actual transactions collected by the local valuation committee.

The capitalised income method applies to let residential, commercial and mixed-use property. It capitalises the achievable rent, which makes the capitalisation rate decisive: a lower rate produces a higher value, and the reform lowered the rates.

The asset value method applies where neither of the others can be used. It builds the figure from construction costs and land value, adjusted by factors the reform increased.

Three changes operated together. The assumed total useful life of a building rose from 70 to 80 years, which reduces the deduction for age and raises the value. The capitalisation rates fell, which raises the capitalised income figure. And the factors in the asset-value method rose, with a regional factor introduced.

For a family whose German asset is a single property, the effect is that an estate which would have sat within the allowances before 2023 may now exceed them. Nothing about the house changed; the statutory arithmetic did. This is the most common reason a family that took advice some years ago finds the present position worse than expected.

Residential property that is let is brought into the base at 90 per cent of its value under section 13d ErbStG. That relief was long confined to property within the European Union and the European Economic Area. After the Court of Justice of the European Union decided case C-670/21, the German tax authorities extended it by decree of 19 June 2024 to property situated in third countries where the exchange of information is assured, which brings American rental property within its scope and is a point many families and their advisers have not yet taken up.

The second route is section 198 of the Valuation Act, which permits the taxpayer to substitute a proven lower open market value. Proof in practice means an appraisal by a publicly appointed and sworn expert, or a sale of the property at arm’s length close to the valuation date. The burden is on the taxpayer, and the appraisal has to address the condition, the location and any defect that the statutory method cannot see.

Because the statutory methods are blind to condition, the properties where proof is most often worth making are the older ones: deferred maintenance, an unmodernised interior, a difficult layout, a long lease at below-market rent, a right of residence in favour of a surviving relative. None of those reduces the statutory figure, and all of them reduce what the property is worth.

Valuation decides whether German inheritance tax arises and how much of it. The statute prescribes a default figure that the 2023 reform raised materially, and it also gives the taxpayer an express right to prove a lower open market value. In an estate whose German asset is a single older property, exercising that right within the assessment procedure is usually the most valuable single step available.