Tax expense on residential property

Owning a property entails several costs, including taxes. However, measures can be taken to reduce tax expenses and to optimize taxes. If you have any questions regarding tax optimization, our tax lawyers will be happy to help you.

If a property is rented out, the resulting earning is taxable as income. However, if the property is occupied by the owner himself, an imputed rental value is taxable. This imputed rental value is a fictitious representation, intended to put the homeowner on an equal footing with the tenant in tax matters. The same applies to vacation homes.

POSSIBLE OPTIMIZATION MEASURES

In order to minimize the tax expense, administrative expenses, value-preserving measures, deductions for insurance premiums and financing costs can be claimed first. If there is a surplus of expenses, it can be offset against other income, but it cannot be carried forward into the next tax year. It is advisable to plan ahead for this calculation, so as to maximize the possible deductions for real estate costs. In each tax period, there is a choice between deducting the real estate property cost and a lump sum. The lump sum is usually 10 or 20 percent of the rental income or the imputed rental value. In principle, it is worthwhile to fit all smaller, less urgent maintenance work into a given year and in other years, choose the lump sum amount. For major renovations and maintenance, it can be advantageous to spread the work out over several years. For investments, it should be noted that a proof for work related to the value-preserving measures which were taken must be provided, rather than an increase in value. However, if there is an increase in value, this can be deducted when selling the property in order to benefit from the real estate gains tax. Furthermore, investment costs in the context of energy-efficient renovations are fully deductible from direct federal tax and, in most cases, also from cantonal tax, provided the renovations were not subsidized.

Mortgage interest can be deducted from income and the mortgage itself from one’s total assets. Indirect amortization of the mortgage, namely by contributing into the pillar 3a, can be advantageous. AS a result, the mortgage debt is not repaid directly, but only the mortgage interest. The debt interest tax deduction reduces the taxable income and simultaneously, the payments into pillar 3a are deductible. The mortgage is then paid off at retirement using the funds saved in the pillar 3a.

If several properties are owned, the formation of a private real estate company can be advantageous from a tax perspective. This may depend on the investor’s intention and the location of the assets. It is potentially advantageous because the income from a directly held property is usually taxed at a higher rate than the profit of a real estate company. This is especially true when the income is reinvested.

If there remains any ambiguity regarding the tax optimization of real estate, our tax law legal experts are happy to help you.