In this information sheet, we therefore provide you with important information on the subject of taxes and real estate.

Property owners and sellers are repeatedly confronted with various tax issues that arise both during the ownership period and when selling a property. It is therefore worth taking a closer look at the various taxes and their effects and peculiarities. Due to the complexity of the tax system, the following text only deals with the situation for natural persons.

a) Tax consequences of owning a property

Income tax: The imputed rental value
This form of income taxation can be found throughout Switzerland for homeowners who live in their house, apartment or vacation property themselves. By living in their own four walls, the owner forgoes potential rental income. However, this rental income would increase the taxable income and thus also the income tax. The state does not voluntarily forego this potential income. It therefore imputes a notional income to the homeowner. According to current federal court practice, this should not be less than 60% of a market rent. The cantons calculate the imputed rental value very differently. In most cases, the cantons rely on presumed land values and estimated values from the building insurance company to determine the property tax value and imputed rental value.

The homeowner can claim two types of deductions from the calculated imputed rental value: On the one hand, the mortgage interest incurred and, on the other hand, the expenses for maintenance and repairs (value-preserving, but not value-enhancing expenses). While mortgage interest can generally be deducted, the deductibility of building maintenance is regulated very differently in the individual cantons. Either a flat-rate amount (10 % – 25 % of the imputed rental value) can be deducted from the imputed rental value as a building maintenance lump sum or, if the actual verifiable expenses were higher, the actual costs can be deducted in most cantons. This option is available annually in many cantons, while in others the deduction mode must be determined for a specific term (e.g. 5 years).  

The imputed rental value increases the taxable income of a homeowner. Despite the deduction options for maintenance costs, this offset cannot be substantially reduced without the deduction of mortgage interest. Older people in particular, who have repaid their mortgages and live on a pension, complain about this tax practice, which results in a considerable increase in their taxable income. Due to today’s very low mortgage interest rates, a home must generally be mortgaged at 60 % – 70 % of its current value in order to avoid a negative tax effect. The problem has been recognized politically and the National Council and Council of States have already discussed the abolition of the imputed rental value (and the associated elimination of deductions for maintenance and debt interest) on several occasions. However, no proposal has yet proved capable of winning a majority.

Property tax
Properties are only assessed at around 70% of their market value for property tax purposes. When purchasing a property for CHF 1 million, a tax reduction of around 30% or CHF 300,000 in assets can therefore be expected. The taxable assets are reduced by this amount, which results in a (slight) tax reduction. However, homeowners cannot influence wealth tax either positively or negatively.

Property taxes
12 cantons (BE, LU, FR, AI, SG, GR, TG, TI, VD, VS, GE, JU) have an annual property tax for the ownership of private properties. This can be levied either at cantonal or communal level and ranges from 0.3 – 3 per thousand of the official market or tax value, depending on the canton.

b) Taxes resulting from changes in ownership (= disposals)

Property gains tax
The tax that often causes homeowners the most concern is property gains tax. This tax is levied by the cantons and municipalities, but not by the federal government, and is a very important source of income.

The profit from the sale of a property is calculated from the difference between the sales price and the purchase price. It is normally possible to add the value-enhancing investments made since the purchase to the acquisition costs. In addition, the state grants a reduction (discount) on the tax rate depending on the holding period. This takes partial account of inflation between the time of purchase and sale. Only in a few cantons is it possible to fully offset inflation against the purchase price.

Property gains tax is illustrated below using an example from the cantons of Zurich and Vaud:

Transfer taxes
A transfer tax is levied on property sales, which can amount to between 0.35 % and 3.3 % of the notarized sales price, depending on the canton. Individual cantons apply a lower rate for a long holding period. Depending on the canton, the tax is borne by the buyer or the seller, whereby in several cantons the tax is shared between buyer and seller or individual agreements are applied. Under such conditions, both parties are jointly and severally liable for tax claims. For changes of ownership between spouses, as a result of inheritance, gifts or bankruptcy sales, reduced rates apply in most cantons or the tax is waived completely. In some cantons, such as Zurich, transfer tax has been abolished.

Other fees incurred when purchasing a property (no taxes)

• Land registry and notary fees
• Debt issuance and increase costs
• Bank fees for setting up a mortgage (valuation, advice, conclusion of a mortgage agreement)
• Interest hedging fees for mortgages (for early hedging)
• Insurance for new homeowners (e.g. building, water, glass breakage, household contents insurance)

There are many ways to optimize property gains tax:

• If a replacement property is purchased within Switzerland within a reasonable period of time (3 years according to current case law), the seller of the home enjoys a tax deferral.
• In some cantons, e.g. in the canton of Zurich, the tax authorities assess the value of the property once it has been held for 20 years or more. The state is inclined to set this value low in order to trigger higher tax income. The seller does not have to accept the assessed value without discussion. Real estate trustees who have been on the market for more than 20 years and know comparable properties are better placed than a layperson to assess state valuations and, if necessary, raise objections. This specialist knowledge is very valuable for the seller and can result in a tax reduction that can amount to several times the sales commission.
• Investment costs of a value-enhancing and value-preserving nature (e.g. replacement of a kitchen with a higher fit-out standard) are allowed as a percentage (e.g. 50%) for offsetting and in the sense of a value-enhancing investment. Here too, there are different points of view between the seller and the tax authorities and room for legitimate discussion.
• Estate agent commissions, advertising costs (newspaper, internet, etc.), notary fees or transfer taxes can be deducted from the property profit. This indirectly reduces a broker’s commission, for example, by 20 % – 40 % for the seller, depending on the tax rate.

1) Depending on the age of the building
2) Deviating contractual agreements are taken into account unless the seller is subjectively tax-exempt.
3) Only levied on certain properties of legal entities
4) in % of the cantonal tax value

PDF Illusion No. 16

Author: Claude Ginesta

Claude A. Ginesta is a Swiss certified real estate trustee and CEO / owner of Ginesta Immobilien AG.
The company was founded in 1944 and specializes in the sale of real estate in the economic region of Zurich and Graubünden. With branches in Küsnacht, Horgen and Chur, the company acts as an estate agent throughout Switzerland for properties with a supra-regional character.

Publisher of the Illusions series Ginesta Immobilien AG, www.ginesta.ch