Everything about the imputed rental value and its possible abolition
Those who live in their own homes must pay tax on what is known as the imputed rental value as part of their income. However, owners can, for example, deduct mortgage interest from their income. For several years now, there has been a debate on the abolition of the imputed rental value. Why does imputed rental value exist and what would be the consequences of its abolition?
What is the imputed rental value?
The imputed rental value is a notional income for owner-occupied homes that is added to taxable income. Homeowners therefore pay taxes on the potential rental income they could earn by renting the property.
The imputed rental value was intended to ensure a tax balance between tenants and homeowners. It compensates for the better tax situation of homeowners due to the deductibility of mortgage debt interest.
This is how imputed rental value is calculated
Imputed rental value is determined on the basis of the corresponding property and its value. The basis for the calculation is the land and time period construction value of the owner-occupied home as well as various criteria, such as living space, age, and location. The tax administration in the canton of residence then compares or estimates how much rent a similar property costs. In many cantons, a deduction of up to 40% is granted on this amount. The calculation method differs greatly from canton to canton. As a rule, imputed rental value corresponds to approximately 60% to 70% of potential rental income.
Homeowners who believe that the authorities' assessment is too high can challenge said assessment. This may occur, for instance, due to changes on the real estate market or if individual rooms are unused after children have moved out.
Deductions reduce the impact of the imputed rental value
While the imputed rental value of the owner-occupied property creates a higher tax burden, homeowners simultaneously benefit from numerous opportunities for deduction on their property. This includes mortgage interest, maintenance costs, and value-maintaining renovations or conversions, for example.
Whether owners pay more or less tax in the current system depends on the amount of mortgage interest, but also on the individual level of mortgage debt and the income situation. On average, however, starting with a mortgage interest rate of 3% to 3.5%, the deduction options are likely to be higher than the imputed rental value itself. The current model therefore rewards higher debt, as it offers tax advantages if you do not repay the mortgage.
What would be the consequences of abolishing imputed rental value?
The consequences of abolishing imputed rental value depend heavily on the mortgage interest rate level. Depending on the market situation, owners receive a higher or lower tax bill. This is likely to have a correspondingly negative or positive impact on demand for residential property.
In the event of a system change, households would rather seek to repay a higher proportion of the mortgage debt, as the tax incentives of a debt would be removed. However, if you have already paid off most of your home, you would definitely benefit from the abolition of imputed rental value. The amount of the remaining mortgage is low, and the deduction options against the imputed rental value are also low. Until now, such households were disadvantaged because they had to pay tax on higher incomes, but were able to claim less or no interest deductions. This often affects retired people as well.