Tax bylaws on second homes are unconstitutional

Based on current second home taxation, many municipalities levy a second home tax on owners of second properties

I. The basics of current taxation of second homes

Many municipalities levy a second home tax on owners of second properties. According to the numerous municipal tax bylaws concerning second homes, the second home tax rate calculation is based on gross annual rental income as at 01/01/1964; this figure is multiplied by various factors, depending on the bylaw, to take account of the changed circumstances. For example, one common approach is to multiply it by the cost of living index of all private households in Germany – though as this index has not been updated since 1999, some municipalities multiply by a fixed extrapolation factor, for example 4.43. Other municipalities have replaced the index with the national consumer price index.

What all these calculation methods share is, firstly, that they are based on the 1964 benchmark, and second, that they determine the annual increase on the basis of national standards, even though rents and property prices in Germany have diverged considerably over the last 55 years. Ultimately, the calculation method supposes that the rent for a property developed on Lake Starnberg in 2018 would have appreciated over the last 55 years at exactly the same rate as a tower block apartment with hot water built in Kiel Mettenhof in 1965.

II. Built in 1965 with hot water and bathroom, this is no luxury new development in the eyes of fiscal law

The question of whether a residence built in 1965 meets the provision of equality before the law (Article 3 paragraph 1 Basic Law [Grundgesetz, “GG”]) if it is still considered a high-value new development for tax purposes in 2019 because it has a central hot water supply and double glazing, was answered by the Federal Constitutional Court last year with a resounding “no” in relation to land tax.

Which meant it could only be a matter of time before the tax on second homes also came under constitutional scrutiny – as has now happened. Back in 2018, the Lüneburg Supreme Administrative Court ruled that there were no grounds to dispute a tax bylaw on second homes based on gross annual rental income; this ruling was then challenged by the Schleswig Supreme Administrative Court, which declared that the tax bylaw concerning second homes in two Schleswig-Holstein municipalities was incompatible with Article 3 paragraph 1 GG. The Schleswig Supreme Administrative Court went even further than the Federal Constitutional Court in its ruling, allowing for the possibility of retroactive effect, granting the affected municipalities no manoeuvring time before a new regulation could be adopted.

III. What does this mean for the affected municipalities?

Tax bylaws concerning second homes which make reference to Section 79 German Valuation Act (Bewertungsgesetz, “BewG”), and therefore to the main assessment date in 1964, must be amended forthwith. If the properties held are rental properties, then the contractually agreed net rent without utilities may be used as a benchmark, as is already the practice in a number of municipalities, especially in the new federal states. For owner-occupied properties, the recommendation is that fair value or current standard rent for the location be used.

Dr Johannes Badenhop

Dr Moritz von Rochow