Income Approach: Legal Framework and Areas of Application
The income approach is a central valuation method for determining the value of real estate, businesses, and rights, which is particularly regulated in Germany by numerous statutory provisions. It plays a decisive role both in tax law and civil law contexts and is extensively anchored in the Building Code, the Real Estate Appraisal Ordinance (ImmoWertV), and the Valuation Act (BewG).
Definition and Basic Principle of the Income Approach
The income approach is used to determine the value of developed or undeveloped land as well as businesses based on the sustainable income that can be generated. Unlike the cost approach, which is based on production costs, the income approach focuses on the future financial benefit that the valuation object generates during its remaining useful life. It is primarily used for yield-oriented real estate or commercial properties.
Legal Fundamentals
German Civil Code (BGB)
There are no explicit provisions on the income approach in the BGB; however, the method is significant for valuations in the context of inheritance or matrimonial property settlements (§§ 2311, 1376 BGB).
Building Code (BauGB)
According to § 194 BauGB, the market value of a property is the price that could be obtained in the normal course of business. The market value is to be determined in accordance with the provisions of the ImmoWertV using recognized valuation methods, including the income approach.
Real Estate Appraisal Ordinance (ImmoWertV)
The ImmoWertV specifies the income approach in §§ 17 et seq. and provides detailed requirements for its application. These include:
- Division of the total value into land value and building income value
- Consideration of the remaining useful life
- Application of the market-based property yield rate
- Deduction of operating expenses and appropriate risk discounts
Valuation Act (BewG)
The BewG regulates in § 182 et seq. the valuation of real property for tax purposes. The method is decisive for determining the assessment basis for inheritance tax, gift tax and real estate tax, and is also permissible in capitalization transactions.
Areas of Application in Law and Practice
Real Estate Appraisal
The income approach is the standardized method for the valuation of income-generating real estate (e.g., apartment buildings, commercial properties). It is particularly applied in legal disputes (e.g., foreclosures, divorces or inheritance settlements).
Business Valuation
For the valuation of businesses and business interests, the income approach is used to determine the present value of expected future surpluses (after tax), based on a capitalization rate. In this context, § 11 para. 2 BewG is particularly relevant.
Valuation for Tax Purposes
In the context of tax valuation of assets, the income approach provides the basis for determining the value of specific economic assets, as required for the assessment of inheritance, gift, and real estate taxes.
Family and Inheritance Law Matters
In family and inheritance law, the income approach is needed to determine the value of land or businesses for equalization of accrued gains, calculation of compulsory shares, or inheritance settlements.
Process of the Income Approach
Valuation Steps
- Annual gross income: Calculation of all sustainably achievable revenues (usually rents/leases)
- Operating costs: Deduction of all ongoing costs (administration, maintenance, depreciation, vacancy risk)
- Net income: Difference between gross income and operating costs
- Land yield interest: Separate consideration of the land value according to current standard land value
- Building income: Deducting the land share from the net income; capitalization over the remaining useful life using the appropriate property yield rate
- Income value: Adding land value and capitalized building income yields the total income value of the object
Capitalization rate
The selection of the property yield rate (according to current market activity and published by appraisal committees) is crucial for the amount of the income value. Legal standards in this regard are provided by the ImmoWertV.
Special Features and Limitations
The income approach is subject to high requirements for data collection and forecasting reliability. Legal requirements such as deductions for defects and risks, building law restrictions, and special tax rules limit the free choice and application of the method.
Case Law and Literature
German case law predominantly follows the ImmoWertV and its regulations on the income approach. Judgments of the Federal Court of Justice as well as tax courts confirm adherence to statutory bases and recognized valuation principles.
Conclusion
The income approach is a complex, legally clearly regulated valuation method for properties, businesses and other income-generating assets. It is firmly anchored in German law both for tax and civil law purposes, and is particularly widely used in real estate valuation, land transactions, and company law practice.
Relevant Laws and Regulations:
- Building Code (BauGB)
- Real Estate Appraisal Ordinance (ImmoWertV)
- Valuation Act (BewG)
- German Civil Code (BGB)
Further Reading:
- Commentary on the BauGB
- Beck’s Commentary on the BewG
- Valuation Guidelines and Manuals of the Appraisal Committees
Web links:
- Federal Gazette for Legal Publications
- Information portal of the Appraisal Committees Germany
- Federal Ministry of Housing, Urban Development and Building
Frequently Asked Questions
Which legal foundations govern the income approach in Germany?
In Germany, the income approach is regulated in particular by the Building Code (BauGB) and the Real Estate Appraisal Ordinance (ImmoWertV). § 194 BauGB comprehensively defines how the market value is to be determined and highlights the income approach as a permissible method, especially for properties used to generate income. The detailed procedural steps and application of the income approach are governed by the ImmoWertV, especially in §§ 17 et seq. These provisions specify how the determination of net income, operating costs, remaining useful life, and capitalization with yield rates are to be conducted in a legally secure manner. In addition, there are specific rules in further specialized regulations, such as the Valuation Guideline (WertR), which is to be considered as a supplementary set of rules, and the Valuation Act (BewG), particularly for tax valuations. Courts, especially in civil and tax law, also closely follow these legal requirements and recognized principles in contentious cases.
Who is legally authorized to perform the income approach?
In Germany, the application of the income approach is legally reserved for certain groups of persons. Especially for court-related appraisals and in official contexts, such as in expropriation or tax procedures, only publicly appointed and sworn experts are typically permitted to perform valuations using the income approach. Appointment is made according to § 36 Trade Regulation Act (GewO). For certain purposes, such as mortgage lending by banks, certified real estate appraisers are frequently engaged. Professional associations such as HypZert GmbH or RICS have specific recognized guidelines for their qualification. For private reports, qualified but not sworn real estate experts may also be consulted; however, their reports do not have binding status in legal disputes or before authorities as they do not formally meet the requirements for an expert opinion admissible in court.
Is the income approach mandatory for certain valuation occasions?
The application of the income approach is not universally mandatory under German law, but primarily results from the type of valuation object and its use. According to § 182 para. 3 BauGB and §§ 15 et seq. ImmoWertV, the income approach is to be applied in particular where the property is predominantly used to generate income, such as apartment and commercial buildings, commercial properties, or leased land. In such cases, the law requires at least an examination of the income approach, but the comparative or cost approach can also be relevant, especially for owner-occupied or special-purpose properties. In fiscal valuation procedures, e.g., for inheritance and gift tax under §§ 177 et seq. BewG, the income approach is explicitly stipulated where the real estate is used to generate income. Regardless, contracts or authorities may impose relevant requirements for the mandatory application.
What legal requirements apply to the traceability and documentation of an income value appraisal?
According to § 11 ImmoWertV, an income value appraisal must be prepared in such a way that its content and reasoning are fully comprehensible to third parties, especially courts and authorities. Legal requirements stipulate that all valuation parameters such as net income, property yield rate, operating costs, remaining useful life, structural condition and any special features must be transparently and individually explained and supported by current market and legal data. Furthermore, the valuation must clearly distinguish between forecast elements and established facts and expressly identify any uncertainties. For court proceedings, § 411 ZPO additionally requires the personal signature of the expert. Faulty or inadequately documented income value appraisals can be rejected by courts as unsuitable evidence, which in the worst case can lead to the invalidity of a transaction, the contestation of tax assessments, or the need to repeat an expropriation valuation.
What is the significance of the income approach in court proceedings?
The income approach plays a central evidentiary role in court proceedings, especially in disputes concerning the value of real estate, such as divorce, inheritance settlements, expropriation procedures or foreclosures. Under § 287 ZPO, the court may use estimates in determining loss and value, whereby the income approach is regularly preferred as an objectified and standardized procedure when the property is used to generate income. Compliance with statutory requirements and generally accepted appraisal rules forms an indispensable legal foundation for the judicial usability of income value appraisals. Regardless of the valuation outcome, court-appointed experts with suitable qualifications are regularly engaged, who must provide the court with comprehensible and verifiable reports—otherwise, the evidence may be rejected as inadequate or a superior appraisal may be required.
How do tenancy law and public-law restrictions affect the income approach?
Legal appraisal within the income approach must take into account all relevant tenancy law and public law provisions to ensure a realistic and recognized market value. Tenancy law provisions, such as rent regulations under the Housing Promotion Act or rent control laws, directly affect the permissible level of actual and target rents and can significantly reduce the income value. Likewise, public law restrictions including development plans, preservation or renovation statutes, monument protection or usage restrictions under building law influence achievable income as well as remaining useful life. Ignoring these factors may compromise the legal certainty of the appraisal. The ImmoWertV expressly requires that all value-influencing rights and encumbrances be taken into account (§ 6 para. 3 and § 7 para. 1 ImmoWertV).
What legal consequences can result from incorrect application of the income approach?
The legal consequences of incorrect or arbitrary application of the income approach are far-reaching: In civil law, an incorrectly determined real estate value can render contracts contestable, for example in real estate purchases, divorce settlements or inheritance cases. For tax purposes, an incorrect value can lead to erroneous tax assessments, which in turn can result in additional payment claims or annulments (e.g., contestation of inheritance tax assessments). In expropriation law proceedings, there is a risk that compensation decisions will be annulled and proceedings must be repeated. Experts may also be personally liable, both civilly and professionally, in cases of gross negligence in their work. Ultimately, incorrect application of the method can result in the loss of the expert’s public appointment. Therefore, careful and legally flawless application is always required.
