The fiscal impact of the acquisition of a real estate property in one’s own name in Switzerland

Analysis - 11/10/2016

A real estate acquisition always involves risks and wealth and fiscal consequences. It is essential, therefore, to plan and think about it in the round before making the move.

The purchase of a property in one’s own name (as opposed to through a property company) in Switzerland, whether it be for one’s principal home or for a second home, will have fiscal consequences including the following:

TRANSFER TAX

The transfer tax is a tax levied on legal transactions, the purpose of which is the transfer of ownership of a property, a part of a property or co-property relating to a property against payment in whatever form. This tax is levied by the cantons or, at least, by their communes. The Confederation receives no transfer tax. The transfer tax is levied, in principle, on the purchase price. The tariffs are, in general, proportional. In most cantons and communes the tax is between 1% and 3% of the amount decisive for the calculation (i.e. of the purchase price, of the market value or of the official value of the property).

INCOME TAX

Firstly, the future owner must be aware of the fact that the acquisition of a property will have an impact, respectively, on their taxable income or their income tax. In the case of a principal or second home, the owner will declare a rental value in their income. Although this is a fictional income, the latter corresponds, according to Federal Court case law, to the rent that a third party should pay in the same circumstances for a home of the same kind and presenting the same characteristics. In practice, however, it is difficult to find comparable properties enabling such an approach. This is why the canton tax authorities have set up their own ways of calculating this rental value.

WEALTH TAX

Once the property has been acquired, the latter must be declared as a wealth item. Non-farming properties are, in principle, estimated at their market value. If the property is acquired in exchange for monetary payment, the latter corresponds to its purchase price. If this is not the case, the market value must be estimated. The processes for estimating non-farming real estate properties vary from one canton to the next. Nevertheless, most cantons estimate them at their market value, at their return value or at their market value taking account of the return value.

LAND TAX

This annual tax is calculated on the total value of the property, without deducting any debt that may pertain to the property. It is a canton and/or commune tax. Certain cantons do not levy it. The most commonly used land estimate methods refer to the market value, the return value or to a combination of the two. The land tax rates are, in principle, expressed per thousand and are fixed in all the cantons.

TAX DEDUCTIONS

The acquisition of a property leads to the fiscal impacts which were mentioned above and which may, in part, be neutralised in terms of income tax and wealth tax.



Switzerland is a country of renters. Only a thrid of households own their own home. The country is, moreover, in last position in Europe in terms of own home ownership levels.


 

Maintenance costs

The tax authorities accept the fiscal deductibility of maintenance costs from income, i.e. expenditure which enables the “value of the property to be maintained”. These include costs resulting from the repair or renovation of equipment (i.e. maintaining in good order and returning to good order) and replacement of worn items (windows, heating, washing machines, etc.) by new, equivalent items (replacement purchase). The list of fiscally-deductible maintenance costs may vary from one canton to another. In principle the taxpayer is entitled to choose  ̶  for each property and each tax period  ̶  between deducting the actual property costs or the deduction of a lump-sum amount. This lump-sum deduction may, in principle, be required only for properties which are part of private wealth.

At federal level, for federal income tax (IFD), this lump sum amounts to:

> 10% of the gross return from rents or the NAV if the age of the property at the start of the tax period is 10 years or less

> 20% of the gross return from rents or the NAV if the age of the property at the start of the tax period is more than 10 years

At canton level the lump sum amount varies from canton to canton.

Debts and debt interest

Debts, whether they be mortgage or unsecured debts, for which the taxpayer is liable at the end of the tax year, are deductible from the gross wealth. Private debt interest is deductible only up to the taxable wealth return plus CHF 50,000 in the framework of federal and canton tax. For reasons of brevity, we deliberately exclude from this article issues of inter-canton and international distribution of debts and debt interest. The crucial question of financing the acquisition of the property is raised, however.

On this topic is it still opportune to borrow to finance the acquisition of a property? To answer this question the equity available to finance the property and its net return (after tax) must be weighed against, on the one hand, the market mortgage interest rates and their corollary, the amount of deductible mortgage interest and the future owner’s marginal tax rate (since the interest is tax deductible under the above-mentioned conditions). Taking account solely of the fiscal aspect, in other words as we often hear taking out debt so that the debt interest at least neutralises the rental value, would in our opinion amount to limiting oneself to arbitrating between two situations:
either paying less tax, but paying interest to one’s financial establishment or paying more tax, but less or no interest to one’s financial establishment. This far too restrictive vision does not take into consideration all aspects of wealth. Accordingly the following economic reflection should be had:

if the net return (after tax) on equity is greater than the cost of the loan after tax, it is economically more advantageous to finance the purchase by a loan. Conversely, it is more judicious to finance the purchase of the property solely by equity. In parallel to this purely economic reflection, it is obviously necessary to keep a cash reserve at all times for unscheduled expenditure.

The result of the financing choice depends, therefore, on four fundamental criteria:
> the investor’s risk profile;
> the level of mortgage interest rates;
> the marginal tax rate;
> the cash available and future projects.

Moreover, taking account of the equity available, the debt level will, be a function of other criteria, such as aversion to debt, the personal and family situation of the future owners, the insurance cover in the event of invalidity or death, the handling of all costs or the financial capacity of the future owners. There is, then, no standard solution.

Graph 1 - Real Estate