Anyone who privately owns real estate should plan their finances, ancillary costs and taxes thoroughly. As the owner, you pay tax on the imputed rental value, but this is offset by a number of maintenance deductions. We will show you what really matters in tax planning.
Switzerland is one of the few countries in Europe where the so-called imputed rental value must be taxed. The abolition of this law will be discussed again in parliament this summer. But until that happens, the planned change in the law could still drag on.
Until then, the old system applies: The imputed rental value is regarded as «notional» income and is taxable as income. The Federal Supreme Court stipulates that the imputed rental value must be at least 60 per cent of the market rent. Furthermore, property taxes are of course levied on real estate ownership. Some cantons additionally charge a separate property tax (for example BE, FR, AI, SG, GR, TG,). The tax is usually between 0.1 and 3 per thousand of the taxable value of the property or flat.
Tips you should know
Under current law, mortgage interest is deductible from taxable income. This deduction may amount to a maximum of CHF 50,000 more than the gross investment income of a taxpayer (which can hardly be achieved with usual mortgages and income). As mortgage interest rates have fallen to a historic record low, debt interest deductions are significantly lower. Young families buying their own home also currently benefit less from the debt interest deduction than in the past.
In the current environment, it even more important to plan your finances, taxes and investments well:
Saving tip number 1: Keep records and collect receipts
It sounds simple, but makes the job much easier: It is best to collect all receipts and tradesmen’s invoices throughout the year. Then you will have everything ready and on hand at the end of the tax year. And no bill will be forgotten.
Saving tip number 2: Indirect amortisation
With your amortisation strategy, you set the course for your tax planning. As is well known, you must amortise the mortgage to two-thirds of the purchase price within 15 years. In most cases, it is worth choosing the indirect amortisation route. At the same time, second mortgages are not amortised directly. Rather, your repayments go into a Pillar 3a account at the bank and are pledged. Benefit: The tax-deductible interest remains in the same amount.
Saving tip number 3: Plan your finances & taxes
If you are increasing or amortising the mortgage, if you are tackling major renovations, or thinking about using unrestricted funds: You have the leeway to steer the whole thing. In many cases, it is worth clarifying the tax consequences in advance. Daniel von Arx, spokesman for the Luzerner Kantonalbank (LUKB), said: «With tax, we find that issues such as mortgage repayment, value-preserving versus value-enhancing deductions, increasing the mortgage for renovations versus drawing a Pillar 3a come up again and again.» In addition, there are specific questions regarding the treasury decision on imputed rental value or certain types of debt capital (mortgage, building loan, personal loan). Sound tax advice goes a long way towards making the right decision. For example, the simple question: «What are the tax consequences if the mortgage is, for example, CHF 100,000 higher or lower?»
Saving tip number 4: Don’t forget any deductions!
The whole chapter «Property Maintenance» covers umpteen different topics, which are also interpreted differently from canton to canton. Essentially, the following items are deductible:
- All expenses for the maintenance and preservation of value (repairs, painting or plumbing work, maintenance work in or around the house, normal garden maintenance, etc.).
- All ongoing ancillary costs and insurance premiums in connection with the property.
- Moreover, energy saving investments are fully deductible at the federal level and in almost all cantons. These include new energy-saving windows, solar panels, converting to a heat pump with a geothermal probe, renovation of the façade with an energy-saving focus, etc
Building maintenance: Take note of the cantonal information sheets
«The cantonal tax offices publish information sheets on the subject of tax deductible property maintenance,» says Markus Stoll from the VZ Vermögenszentrum in Zurich. This will show all the details, including the guidelines in the respective canton. For example, since 1 January 2020, the canton of Lucerne has had an exception for the energy-saving measures mentioned above: These expenses are no longer easily deductible, nor do they need to be examined more closely, because they are considered investments.
Further, the following applies in all cantons: Expenses that are not related to the maintenance of the property but are simply part of the normal cost of living are not tax-deductible. For example, the electricity bill or buying energy in general.
Take note of the flat rate
For owners of flats, it is also important to distinguish between the flat-rate deduction and the actual expenses. As a rule, the taxable owner has the choice of claiming either their actual expenses or a lump sum each year. «The flat rate is usually 10 per cent of the imputed rental value or gross income in the first 10 years after purchase,» explains expert Markus Stoll. For properties more than 10 years old, the flat rate then increases to 20 per cent. Here, it is worth planning your expenses in advance and opting for one or the other. From a tax perspective, it makes sense to concentrate certain maintenance work into a specific year – instead of always claiming roughly the same amount of deductions which are slightly higher than the standard deduction.
What counts as an increase in value?
What if you replace a kitchen of a modest standard with an expensive designer kitchen? Or can you create a new wellness oasis in the basement and also deduct it from your taxes?
No. The line between them lies where it is no longer about maintenance and upkeep, but about increasing value. Sometimes this distinction can be quite simple for real estate tax returns: Repainting rooms is of course deductible in your tax return as pure maintenance. Conversely, the sauna, the aforementioned wellness oasis (if there was none before) or the addition of a conservatory are considered an increase in value. In many cases, however, we are dealing with a mix of value preservation and value enhancement. As a result, some tax authorities apply standardised procedures. As the taxpayer, you should check whether the actual share of maintenance should not in fact be higher.
In any case, it’s a good idea to archive all of the receipts. If there is an issue, you as the taxpayer must be able to «prove» all deductions. Important to know: Whatever is classified as an increase in value can be credited later when calculating any property gains tax.
Conclusion: Even if it doesn’t exactly promise to be entertaining: Before you fill in your tax return, it is worth taking a look at the instructions and leaflets from the cantonal tax office. It often makes sense to spread the maintenance and renovation work over several tax years – this helps to break the progression of income taxes over several years.
PS: One of the most frequently asked questions about taxes concerns the deduction of home office expenses. However, this does not concern real estate costs, but professional expenses. The best way to find out is to contact the tax authorities in your canton.