What is the Grundsteuer?

The land tax is the most important form of income for local governments in Germany, bringing roughly €14 billion in revenue into their coffers every year.

And we all pay it – either directly or indirectly. The tax is levied on everyone who owns a property. But even if you are a tenant you still probably pay, as landlords almost always pass the cost onto tenants in the form of Nebenkosten (supplementary costs) in their contract.

You know that strange difference in Germany between Kaltmiete and Warmmiete? Well some of that is heating costs, but a lot is also the land tax.

Research by the Institute for the German Economy shows that the Grundsteuer on a typical apartment is €299 each year.

Why did the Constitutional Court rule on it?

Landowners have been complaining for years that the tax is unfair – and it’s not hard to see why. The tax is based on an estimate of the value of a property which is, er, well, rather out of date.

Properties were last valued for the tax in west Germany in 1964 and in east Germany in 1935. So when your local Finanzamt calculates the tax, they are doing so based on the value of your property over half a century ago.

Property owners argue that values have changed somewhat since then. For instance an apartment that was stuck next to the Berlin Wall in 1964 could now be in one of the trendiest neighbourhoods in Germany.

Why has nothing been done about this before?

The small print of the land tax calls on the federal government to carry out a reassessment of property values every six years. But for the past 50 years governments have always said that new assessments are too time intensive.

Even before Tuesday’s ruling though, there was general consensus among politicians across the country that something needed to change. A majority of the federal states therefore suggested a new way of assessing the tax back in 2016.

The proposal foresaw that property value would be replaced by a calculation based upon size of property, location, transport connections and cost of build.

But both Bavaria and Hamburg blocked the change, fearing that it would lead to a rise in taxes for their inhabitants.

What happens now?

The Constitutional Court has given the federal government until the end of 2019 to come up with a new way of calculating the tax. Once the new law has passed through the Bundestag, the government will have a bridging period of 2024 to carry out the assessments necessary to start levying the tax accordingly.

The courts thus took into account the fact that it could take a long time to reassess all 35 million properties that exist in Germany.

How will the ruling affect us?

It is really hard to say at this point what the ruling means for the normal tax payer. The Constitutional Court rules on the validity of current laws, it doesn't prescribe how new laws should look.

Therefore it is too early to say what a new way of assessing the land tax might look like.

But the Süddeutsche Zeitung (SZ) reports that tax could increase for some properties by a multiple of forty if they were to be re-assessed according to value.

Property values have generally risen most sharply in inner city areas and in suburban areas with good transport connections. It is therefore possible that a new way of assessing the tax could lead to higher payments in areas of downtown Berlin and Munich where property prices have risen most dramatically in recent years.

The government reportedly favours a method of assessing the tax which would penalize properties that are unused, thus deterring speculation and freeing up land for badly needed new housing.

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