Inheritance tax: It can be expensive for real estate heirs in 2023!

Why is it now becoming more expensive for real estate heirs?

As a result of sharp price increases on the real estate market and a new generation of heirs, a high tax sum is expected in the coming years. The post-war generations in Germany were able to build up large fortunes over decades, which they will pass on to their descendants over the next few years. In the past 20 years, the net worth of private households in Germany has more than doubled to 13.8 trillion euros. The amounts of future inheritances and gifts are therefore likely to be significantly higher than previously assumed.

In the period up to 2027, the annual inheritance volume in Germany will be increased according to a DIW study including donations of up to 400 billion euros and is therefore around 28 percent larger than estimated in previous analyses. The state collects just over ten billion euros per year in inheritance tax.

The value of land and real estate inherited for tax purposes has risen particularly sharply. In 2010, houses or land with a total value of 7.4 billion euros were inherited. In 2021, the sum almost tripled - to 21.4 billion euros. The figures for real estate are gross amounts, the estate liabilities are deducted from this. Gifts or inheritances that fall under the tax allowance are also not included.

After lengthy debates, the Federal Government has now passed an amended Annual Tax Act on January 1, 2023. On the one hand, its aim is to adjust to the actual price level on the real estate market: The real market value should be better taken into account in inheritance tax. On the other hand, the government is striving for more social justice. Because anyone who already has large assets can expect larger growth and pass on more to their descendants accordingly. According to the DIW study, the individual inheritances to be expected amount to around 79,500 euros - in the top fifth of the distribution a good 248,000 euros, in the bottom fifth 12,000 euros.

What will change when it comes to heirs in 2023?

Until now, the calculation of inheritance tax has often resulted in values that were below the current market value. The new annual tax law therefore increases the so-called tangible value factor, by which the value of the property is multiplied. This factor depends on the current real estate market.

So far, the factor for single and two-family houses and condominiums has been between 0.5 and 1.5 (Annex 25 to the Valuation Act — BewG). Following the legislative amendment, it is between 0.8 and 1.8 as of this year, which should mean an adjustment to the current market level. Alternatively, a committee of experts can determine the factor for the respective region.

In addition to these methods for determining the value of real estate, there is also the comparative value method. The comparative value method has priority over the tangible value method and the income value method.

The significantly higher burden resulting from the new valuation is causing distress to many heirs. In many places, there is already talk of emergency sales when heirs can no longer pay the tax. The Federation of Taxpayers sees negative consequences in particular for those whose real estate values have so far been just below the tax allowance but will exceed it in future as a result of the higher valuation. In addition, for everyone who was above the allowance before the changes and for heirs of large commercial or residential properties.

What are the options for reducing taxes?

But even those who could not or did not want to make a donation before the new regulation came into effect can take some measures in the future to reduce the tax burden for their descendants:

• Use allowances

The tax allowance significantly reduces the taxable property value. Depending on the degree of relationship, the following allowances apply at the moment:

• Spouses/partners: 500,000 euros
• Children/stepchildren: 400,000 euros
• Grandchild: 200,000 euros
• Parents and grandparents: 100,000 euros
• All other heirs: 20,000 euros

The allowances relate to donations and inheritances and can be reused every ten years. Only what remains after deducting the allowances from the asset is subject to inheritance or gift tax. The tax rates of inheritance and gift tax - just like the personal allowances - depend on the tax brackets and are also progressively staggered.

It could also be worthwhile to wait and see whether higher allowances are implemented from traffic lights. According to some parties, the allowances should grow with rising valuations.

• Own use of the property

Widowed spouses or partners do not have to pay inheritance tax if they remain in the house for at least ten years. The same applies to children, but only with living space of up to 200 square meters.

• Make use of usufruct

In addition, the testator may reserve a right of residence and/or usufruct. This lowers the value of the property and can therefore have a positive effect on gift tax.

Real estate as an attractive asset class

It is not foreseeable to what extent the higher inheritance and gift tax combined with inflation and rising interest rates will have on the German real estate market in the coming years. forecasts, such as from Deutsche Bank However, due to high financing costs, expect an end to the decades-long boom in 2023, which by definition cannot last forever.

However, there can be no question of a “bursting of the real estate bubble,” as continued high demand is offset by continued low supply. In popular cities such as Berlin, Cologne or Hamburg, the number of completed apartments has even fallen last year.

That is why real estate or Real estate investments - even with regard to existing inflation risks - still in every diversified portfolio. According to Deutsche Bank, particular attention should be paid to energy-efficient properties that could prove to be as sustainable as they are price-stable.

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