Imputed rental value: What you need to know
Many owners of single-family dwellings and owner-occupied apartments object to imputed rental value for residential property. But what is imputed rental value exactly, and how is it calculated? The current system has by no means the same financial impact on every homeowner.
Imputed rental value achieves a balance between tenants and homeowners
Imputed rental value is a notional taxable income on owner-occupied properties. It was introduced as part of the federal tax, which was collected as a defense tax during the Second World War. Homeowners pay tax on the rental income that they would receive if they were to rent out the property.
At first this sounds absurd. Why pay tax on income that hasn't been received? Closer examination shows that the imputed rental value aims to achieve a balance between tenants and homeowners in terms of the taxes they pay. This is because those who own residential property usually live more cheaply than if they rented the same property. In accordance with Switzerland's solidarity-based tax system, real estate owners are therefore required to pay more.
Deductions reduce the impact of the imputed rental value
Imputed rental value means that homeowners pay significantly more tax than tenants, at first glance at least. But real estate owners can also deduct mortgage debt, maintenance costs, and the costs of conservation work on historic buildings from their taxes. This makes it attractive to not pay off mortgages but rather to be indebted to the bank.
All value-maintaining expenses may also be deducted from tax, i.e. repairs and renovations. Value-enhancing expenses such as a new luxury kitchen or newly built conservatory are excluded. Thanks to these deductions, the extra tax burden from the imputed rental value is decreased – or under certain circumstances canceled out entirely.
Imputed rental value is calculated by the tax administration
Various criteria are taken into account to calculate the imputed rental value, such as the habitable floor area, location, construction method, and age of the property. The tax administration compares or estimates how much rent would have to be paid for a similar property. In many cantons, a deduction from this amount of between 10% and 40% is granted. The calculation of the imputed rental value depends on your place of residence and the amount can vary greatly from canton to canton. For the direct Federal tax, an estimate is used that is standardized and hence higher in some cases.
If homeowners have the impression that the imputed rental value is too high, they can contest the calculation. In addition, rooms that are unused, for example because children have moved out, can lead to a reduction in the imputed rental value.
Homeowners would like to stop paying tax on the imputed rental value
Imputed rental value is controversial. Many homeowners regard it as unfair. There have been several motions in favor of a new system. In 2017, the Committee for Economic Affairs and Taxation of the Council of States launched a parliamentary initiative and drew up a bill to abolish it. It remains to be seen whether this will be approved, or will fail like previous motions. The financial consequences for homeowners are no less uncertain, and will depend on the way it is abolished. Several possibilities are under discussion.
Simply abolishing imputed rental value is unlikely to win a majority in parliament or among the electorate. However, what matters for homeowners with high mortgages is which deductions they will still be able to make in the future, and how high the mortgage interest rate is at that time. If interest rates are higher, many owners are likely to be in a worse position if imputed rental value is abolished and deductions for residential property are canceled. The same applies to owners who invest a great deal in maintaining an old house.
Imputed rental value rewards high indebtedness
In sum, the current tax model including imputed rental value makes it appealing to not pay off mortgages. Imputed rental value varies in importance depending on the costs of mortgage interest and maintenance. In particular, long-standing homeowners with no mortgage or a low mortgage would benefit from the abolition of imputed rental value. They would have to pay less tax. Abolition could be problematic for first-time buyers with high maintenance costs and a high mortgage if mortgage interest were no longer at today's very low level.