Common value

Fair market value is the price that could be obtained in ordinary business transactions based on the characteristics, condition, and location of an item, without taking into account unusual or personal circumstances. It is legally defined in Section 9 of the Valuation Act (BewG) and essentially corresponds to the market value as defined in Section 194 of the Building Code (BauGB). In real estate valuation, it serves as a tax benchmark for inheritance, gift, and real estate transfer taxes.

Distinction from Market Value and Lending Value

Although fair market value and market value are virtually identical in substance, they differ in their context of application: Market value is the civil law term (BauGB), while fair market value is the tax law term (BewG). The mortgage lending value, by contrast, is usually 10-30% below fair market value, as lending institutions base their calculations on a sustainable, cyclically independent value that can still be realized in the event of foreclosure.

For property owners, this distinction is relevant in the context of inheritance and gifts: The tax office determines the fair market value for tax purposes-and this may, under certain circumstances, deviate significantly from the price actually achievable on the market, provided that the tax office’s standardized valuation approach does not take all value-reducing factors into account.

Valuation Methods

The tax office generally determines the fair market value of developed properties using the comparable sales method, the income approach, or-as a fallback-the cost approach, in accordance with the Real Estate Valuation Ordinance (ImmoWertV). If a current appraisal by a publicly appointed and sworn expert is available, the tax office generally accepts this value, provided it is lower than the tax value.

An overview of the methods:

• Comparative market approach: Suitable for apartments and single-family homes for which sufficient comparable prices are available. The tax office uses purchase price databases maintained by expert committees.
• Income approach: For multi-family homes and investment properties. Based on rental income, operating costs, and the property interest rate.
• Cost approach: For properties where the other methods are not suitable (e.g., industrial buildings, single-family homes in very rural locations). Construction costs minus depreciation plus land value.

Significance in Inheritance and Gifting

For inheritance and gift tax purposes, the tax office uses the fair market value as the basis for assessment. Exemptions (e.g., 400,000 euros for children) are deducted from the fair market value. A professional appraisal can help to present the fair market value realistically-and thus as low as possible-if the tax office’s standard valuation appears too high.

When is a counter-appraisal advisable? Whenever the property has special features that are not adequately taken into account in the standardized procedure: significant renovation backlog, unfavorable location, limited usability due to tenancy law or usufruct rights, specific construction defects, or atypical property shapes. In such cases, the actual fair market value may be significantly lower than the tax office’s valuation.

Fair Market Value and Real Estate Transfer Tax

Fair market value also plays a role in real estate transfer tax: As a rule, real estate transfer tax is levied on the agreed-upon purchase price. However, if this price is below the fair market value-for example, in the case of a gift with consideration or a sale between related parties-the tax office may use the fair market value as the basis for assessment. Caution is therefore advised in the case of discounted transfers within the family.

Practical Tip for Property Owners in Nuremberg and Franconia

In the Nuremberg metropolitan region, tax offices frequently value real estate in cases of inheritance or gifting based on standard land values and standardized procedures that take only limited account of a property’s individual condition. We recommend obtaining an appraisal from a certified expert for larger transfers-especially for older buildings in the Nuremberg metropolitan area or existing properties in Erlangen and Fürth, where the actual market value can be significantly lower than the tax office’s standard value.

In specific cases, by coordinating an independent expert appraisal, we have been able to reduce the taxable market value for our clients by 15 to 25 percent compared to the tax office’s valuation-which, for a property valued at 600,000 euros, translates to tax savings of several thousand euros. The cost of the appraisal (typically €1,500 to €4,000) pays for itself very quickly in such cases.

Frequently Asked Questions

Is the fair market value always equal to the purchase price?

Not necessarily. The purchase price may differ due to personal circumstances (distressed sale, family relationship). The fair market value is based on the average market price under normal conditions.

Can I challenge the fair market value if the tax office has set it too high?

Yes. A lower fair market value can be demonstrated with a counter-appraisal from a recognized expert. The tax office must take a conclusive appraisal into account. The appraisal must have been prepared by a publicly appointed and sworn or certified real estate expert-a mere real estate listing is not sufficient.

Does the fair market value also apply to undeveloped land?

Yes. For undeveloped properties, the fair market value is largely based on the standard land value set by the expert committees, but may vary upward or downward depending on location, development status, and buildability. A property in a zoning plan area with building rights is significantly more valuable than one in an outlying area without building rights.

When is the fair market value particularly important?

The fair market value is particularly relevant in cases of inheritance and gifts (as the basis for tax assessment), in determining real estate transfer tax in special cases, in calculating the statutory share of the estate (which is based on the fair market value of the estate), and in judicial estate settlements among multiple heirs.

How is the fair market value determined for rented residential properties?

For rented residential properties, the tax office applies the income approach in accordance with the Valuation Act. The annual gross income (12 times the annual net rent excluding utilities) is reduced by the flat-rate management cost ratio and then capitalized using a multiplier derived from the property interest rate and the remaining useful life. Added to this is the separately determined land value. However, this standardized method does not always reflect the actual market situation. If the current rent is significantly below the local comparative rent-which is often the case with long-term leases in older buildings in Nuremberg-the actual income value may be lower than the value determined for tax purposes. In such cases, an expert appraisal that takes into account the individual rent control, the condition of the property, and the realistic re-rental rate can result in a significantly lower fair market value and thus a lower tax burden.

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