Letting to related parties

Letting to related parties

When renting to related parties, various aspects must be taken into account when setting the rent in order to avoid tax consequences.

A rent below the market value represents a preferential rent, which initially appears to be advantageous for both parties: the tenant benefits from a low rent and the landlord saves taxes due to the lower rental income. However, if the preferential rent is very low, the tax authorities may assume that tax is being avoided. According to the practice of the Federal Supreme Court, tax avoidance is assumed if the rent is lower than half of the imputed rental value for direct federal tax purposes. As a result, the difference between rental income and imputed rental value is offset against the landlord’s taxable income. In the case of apartment buildings in which identical apartments are rented to related parties at a preferential rent and to third parties at market prices, the authorities can use the market price as a comparative figure due to the direct possibility of comparison. In this constellation, the preferential rent should not be less than half of the market rent, otherwise the entire imputed rental value will be taxed. As a result of the tax office’s correction, the landlord pays tax on property income that he has not actually earned.

Objective reasons for a rent that is too low should be stated in the declaration in order to avoid offsetting. If the landlord also uses the property that he is renting out at a preferential rent (e.g. as a vacation home), the tax office may assume that there is a fictitious tenancy. In this case, the full imputed rental value is taxed. Depending on the relationship with the landlord, there is a risk of gift tax for the tenant, as the monetary benefit from the preferential rent (difference between preferential rent and imputed rental value or market rent) could be classified as a gift. Despite the ruling of the Federal Supreme Court, there are different cantonal regulations regarding the offsetting of capital gains in the case of a preferential rent. A close look at the relevant tax law is essential when determining the rent.

Source:
Raphael Kissling, Partner at TreuVision
TreuVision supports small and medium-sized enterprises (SMEs) with bookkeeping, accounting and financial management.