Inherited or gifted property: how the process works at the tax office

Anyone who inherits a property or receives one as a gift often gets several letters from the tax office, sometimes even from different tax offices. This confuses many people. The reason is simple: for inheritances and gifts, two units work together, and each is responsible for something different.

The valuation unit: the value of the property

The valuation unit belongs to the tax office in whose district the property is located. It has only one task: it determines the value of the property for tax purposes, the so-called assessed property value (Grundbesitzwert). To do so, it requests a property value declaration in which you provide details of the plot, the building and, where applicable, rents. The result is a separate notice: the notice of assessment of the property value (Feststellungsbescheid).

The valuation unit does not deduct lifelong encumbrances such as a usufruct or a right of residence. It values the property as if it were free of them. The second unit takes care of these encumbrances.

The inheritance tax unit: the tax

The inheritance tax unit belongs to the tax office responsible for the last place of residence of the deceased or the place of residence of the donor. It keeps track of the entire acquisition. It takes the assessed property value from the valuation unit and uses it to calculate the tax:

• It deducts the capital value of a lifelong usufruct or right of residence.
• It takes debts into account, for example a loan taken out by the deceased.
• It deducts the allowances, for example EUR 400,000 for children.
• It sets the tax in the inheritance or gift tax assessment.

We explain how the capital value of a usufruct or right of residence is calculated in our article on usufruct and the right of residence.

The typical process

1. Notification: for a gift, the notary reports the contract to the tax office, so no separate notification is needed. For an inheritance, the heirs must report the acquisition themselves within three months. If the estate includes a property, this also applies when a will has been opened (Section 30 ErbStG).
2. Request to file a tax return: the inheritance tax unit asks you in writing to file an inheritance or gift tax return. It sets a deadline of at least one month (Section 31 ErbStG). You only have to file the return once this request arrives.
3. Valuation: if a property is included, the inheritance tax unit involves the valuation unit. You then receive a request to file a property value declaration from there, also with a deadline of at least one month (Section 153 BewG).
4. Notice of assessment: the valuation unit determines the assessed property value and sends the notice to you and to the inheritance tax unit.
5. Tax assessment: the inheritance tax unit takes over the value, deducts encumbrances and allowances and sets the tax.

As a rule, you will therefore receive two requests from two units: one to file the inheritance or gift tax return and one to file the property value declaration. The two deadlines run separately. If time gets tight, your tax adviser can apply for an extension.

Where does the objection belong?

This is the most important point, and this is where most mistakes happen. The assessed property value is binding on the inheritance tax unit. Anyone who considers the value of the property too high must therefore lodge an objection against the notice of assessment issued by the valuation unit. An objection against the later tax assessment does not help with the value of the property (Section 351 (2) AO). Once the deadline for the notice of assessment has passed, the value can as a rule no longer be changed.

An objection against the tax assessment only applies to points decided there, for example the deduction of a usufruct or right of residence, allowances or the tax class.

The objection period is one month after notification of the respective notice. Your tax adviser or lawyer handles the objection and the deadlines.

When you should bring in an expert

• Before the property value declaration: if the tax value is likely to be above the market value, an appraisal can be submitted together with the declaration.
• If the notice of assessment is too high: lodge an objection within one month and submit the appraisal later.
• If the value of a usufruct or right of residence is disputed: under certain conditions, an appraisal can prove a different value than the tax office table. It goes to the inheritance tax unit.
• If several heirs divide the property or one buys out the others: the market value counts here anyway, not the tax value.

An appraisal of the property value under Section 198 BewG is addressed to the valuation unit, an appraisal of the value of a right of use to the inheritance tax unit. We will tell you in advance which appraisal you need in your case.