Economic entity

Economic Unit - The economic unit is the central object of valuation under the German Valuation Act (BewG). It encompasses all assets that, according to generally accepted practice, form an economic unit and belong to a single owner. For real estate, this means that land, buildings, and essential components are treated as a single unit for valuation purposes-a factor that is decisive for calculating property tax and inheritance tax. The correct delineation of economic units is highly relevant for tax purposes and is often underestimated by owners.

Delimitation and Valuation Law

The tax office determines a separate property tax value for each economic unit (since the 2025 property tax reform, as the successor to the unit value). Clear rules apply here:

A developed plot of land with a single-family home is an economic unit. If the same owner possesses two adjacent plots of land that can be used independently, there are two economic units-even if they are listed on the same land register page. Conversely, multiple parcels of land can form a single economic unit if they are used together (e.g., a residential house with an adjacent garage plot that serves exclusively the residential house).

The following factors are decisive for the demarcation under § 2 BewG:

• Actual use: Are the properties used together or separately?
• Spatial contiguity: Are they adjacent to each other, or are they separated by streets?
• Economic contiguity: Are they functionally dependent on each other?
• Public perception: Would an uninvolved third party view the properties as a single unit or as separate properties?

Correct delineation has a significant impact on property tax: If units are incorrectly grouped together or separated, this can lead to an overestimation or underestimation of the tax assessment.

Significance for Property Tax Reform and Inheritance Tax

Since January 1, 2025, the new property tax values have been in effect in Bavaria. Each economic unit receives its own property tax assessment notice. In Bavaria, the area model applies-the tax is calculated based on land and building area, not on market value. Nevertheless, the delineation of economic units remains significant: If two separate parcels of land are incorrectly assessed as a single unit, reductions in the tax base or classifications of usage categories may be incorrect.

For inheritance tax (Sections 157 et seq. of the German Property Valuation Act), the economic unit determines which valuation method to apply-comparable sales method, income approach, or cost approach-and which exemptions apply. For owners with multiple properties, the following question is crucial: Do the properties constitute one or more economic units? For gifts to children, a tax-free allowance of 400,000 euros applies per acquisition-a sensible division into multiple economic units can help to utilize these allowances multiple times.

Economic Unit in Condominium Law

In condominium ownership, each condominium unit is a separate economic unit-regardless of whether the building belongs to a condominium association (WEG). Each unit receives its own property tax assessment notice. An underground parking space is considered a separate economic unit if it is registered as a separate condominium unit in the land registry. If it is part of the common property, it is attributed to the economic unit of the common property.

Practical Tip for Owners in Nuremberg

We recommend that Nuremberg owners carefully review the property tax assessment notices from the Nuremberg-North or Nuremberg-South tax office-particularly the assignment of the economic unit. Errors frequently occur in multi-family homes with separate garage parcels or in row house properties where driveways are registered as separate parcels in the land registry.

You can request corrections within the one-month objection period following delivery of the notice. For larger real estate portfolios-e.g., in neighborhoods such as Gostenhof, St. Johannis, or Maxfeld, where many long-time owners possess multiple parcels-it is advisable to seek tax advice to ensure the optimal delineation of economic units. We assist you in interpreting the notices and, if necessary, drafting objections.

Frequently Asked Questions

Who determines what constitutes an economic unit?

The competent tax office determines the boundaries of the economic unit-in accordance with the principles of Section 2 of the Property Valuation Act (BewG). The prevailing market perception is decisive, taking into account local customs, actual use, and spatial proximity. Owners may file an appeal against an incorrect classification within one month. We recommend consulting a tax advisor specializing in real estate taxes at an early stage in cases of doubtful classifications.

Can I split or merge an economic unit?

Yes, the economic unit can be altered through property division (survey by a publicly appointed surveyor and entry in the land register) or through merger of parcels. The tax office will then adjust the valuation at the next assessment date. A division can be tax-advantageous-for example, to utilize multiple tax-exempt allowances for gifts or to achieve a more favorable usage class for property tax.

How does the economic unit affect property tax?

Each economic unit receives its own property tax assessment base, to which the municipal assessment rate is applied. In Nuremberg, the assessment rate for property tax B is currently 555%. If two properties are incorrectly assessed as a single unit, the property tax may be higher or lower because, for example, valuation discounts for certain uses or areas are taken into account only once instead of twice. During the revaluation as part of the property tax reform, all owners should actively review the assessment notices.

What counts as an “essential component” of an economic unit?

Essential components under Section 94 of the German Civil Code (BGB) (buildings and items permanently attached to the building) automatically form part of the property’s economic unit. This includes: buildings, heating systems, photovoltaic systems (if mounted on the building), and built-in kitchens (if not separable). The following do not belong to the economic unit: independently transferable leasehold rights, condominium units owned by other owners, and movable property (furniture, freestanding appliances).

Back to the Real Estate Glossary.