The constitutionality of assessing real estate tax on the basis of the federal model
The real estate tax reform resulted in a revaluation of properties throughout Germany and raised many constitutional issues. Here, the discussion has focused on the income capitalisation method, provided for under federal law, which is characterised by extensive standardisation or consolidation into flat rates and, in practice, it has frequently been criticised. Against this background, great importance has been attributed to the clarification by the highest court of the constitutional admissibility of the federal model (Bundesmodell).
The Bundesmodell under review at the Federal Fiscal Court
Basic classification
The Federal Fiscal Court (Bundesfinanzhof, BFH) ruled on three appeals cases on the valuation of real estate on the basis of the income capitalisation method of the Bundesmodell and, in its judgements of 10.12.2025, confirmed that the applicable statutory regulations were indeed constitutional (case references: II R 25/24; II R 31/24 and II R 3/25). The starting point for the disputes was the revaluation of all properties, which was carried out as part of the real estate tax reform as at the date of the main assessment of 1.2.2022; this has formed the basis for levying real estate tax since 1.1.2025. While individual federal states have made use of the saving clause and have introduced their own valuation or levying models, in most of the federal states the value is still determined according to the requirements under federal law.
Application of the income capitalisation method
Under the Bundesmodell, the real estate tax value constitutes the assessment base for the new real estate tax. For single-family houses, two-family houses, residential properties for letting as well as owner-occupied apartments and jointly owned areas this value has to be determined in accordance with the requirements of the German Valuation Act by means of the standardised income capitalisation method. To this end, - taking into account the differences in location, type of building and living area - an approximated flat-rate net rent (exclusive of heating, lighting and other service costs) per square metre of living area is estimated and then this amount is reduced by approximated running costs and, subsequently, capitalised.
In addition to this, the discounted land value based on the applicable indicative land value has to be taken into account.
Subject matter of the cases submitted to the BFH
The subject matter of the cases decided by the BFH was real estate tax value assessments for let and owner-occupied apartments in multi-family houses in North Rhine-Westphalia, Saxony and Berlin. The properties concerned differed both in terms of their size as well as their respective residential locations.
The claimants objected to the statutory framework of the income capitalisation method and criticised, in particular, the federal government's lack of legislative power as well as the violation of the general principle of equal treatment under Article 3, paragraph 1 of the Basic Law (Grundgesetz,GG). To substantiate this, they pointed out that the standardised valuation parameters for determining the value of the building have been defined too broadly and, thus, do not allow for a realistic representation of the actual value situation. Moreover, the use of indicative land values is problematic as these are not available throughout Germany in a sufficient degree of difference and, as a consequence, property-specific particularities are disregarded.
Legal assessment: the BFH confirmed …
In all three cases, the BFH dismissed the appeals as unfounded. Solely the appeal in the case with the reference II R 31/24 was partially successful for procedural reasons, however, this did not affect the substantive assessment of the valuation rules. In the opinion of the BFH, there are neither formal nor substantive concerns in terms of the compatibility with constitutional law regarding the legal requirements of the Bundesmodell. The federal government has the concurrent legislative power for the reform of real estate tax and it made use of this power in a permissible way.
… that the legal standardisation and consolidation into flat rates is justified
The BFH also denied that Article 3, paragraph 1 GG had been violated. The legal standardisation and consolidation into flat rates is constitutionally justified. The German government has created a valuation system that is conceptually based on market value and it has been designed to determine, on the basis of the average of all the properties that were assessed, an objective as well as a realistic property value within an acceptable approximation corridor for the fair market value. Complete accuracy in individual cases is however not necessary.
The decision has extensive practical implications
In the absence of unconstitutionality, a referral to the Federal Constitutional Court was not considered. The decisions are important not just for the federal states that were specifically concerned - namely North Rhine-Westphalia, Saxony and Berlin -, but for all the federal states that apply the Bundesmodell, namely, Brandenburg, Bremen, Mecklenburg-Western Pomerania, Rhineland-Palatinate, Saxony-Anhalt, Saarland, Schleswig-Holstein and Thuringia.
