Real estate holding: Properly holding real estate and optimizing taxes
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Holding real estate: Take advantage of optimization potential

What is the most expedient form, from a tax perspective, for holding real estate? Private real estate investors often ask themselves this question. Find out which factors must be taken into account and how Credit Suisse supports you in this.

When purchasing real estate, investors are always faced with the question of the form in which they should hold the property: as a private asset, a business asset, or indirectly through a real estate company. Many factors play a role in this decision. Therefore, it is advisable to comprehensively analyze the situation. In this context, the key points are the initial situation, the investment strategy, and the tax consequences of the acquisition, holding, and sale of real estate. This is explained in more detail below.

Background and investment strategy

The investment strategy should reflect the purpose and the time horizon of real estate ownership. Depending on the needs, other forms of holding may be suitable. For instance, if the investor intends to use the acquired property as residential property for themselves, it is advantageous to hold the real estate as a private asset – also with regard to a subsequent inheritance or the option of a tax-deferring replacement purchase.

If the goal is to acquire several properties at a low price, upgrade them, and then promptly sell them for a profit, a holding form as a business asset of a sole proprietorship/partnership, or of a corporation, should be considered – especially in cantons with a dualistic tax system.

The investment strategy of each client is individual and must be taken into consideration accordingly. This can also have an impact on the financing conditions of the lender. In practice, we encounter the following investment strategy types, which significantly influence the result of a consultation.

Typical investment strategies for real estate

"Holding"

Holding of the property with the smallest possible effort. The net surplus is used for living expenses or invested in securities.

"Growth"

The net surplus is invested in new real estate. No sale of real estate is planned.

"Inheritance"

No sale of real estate is planned. A fixed allocation of real estate to heirs is planned.

"Trading"

The net surplus and sales profits are invested in new real estate. The sale of real estate is planned in the near future.

"Development"

Development of real estate projects. Sale of condominium units or subdivision of land. Real estate used for commercial or business purposes.

"Property as a private pension"

Regular net surplus amounts from real estate complement or replace income from state or occupational pension provision. No sale of real estate in the near future is planned. 

"Private pension provision with a real estate company"

For an operating company with excess liquid assets. Creation of a kind of "private pension fund" with real estate in a real estate company.

Impact of holding form on tax burden

The tax consequences of the acquisition, the holding and, ultimately, the sale of real estate are crucially important for selecting the ideal holding form. This is because they are subject to regulations that vary significantly by canton and therefore depend on the location of the property. This is particularly important when buying and selling, because the transaction costs (real estate transfer tax, land registry fees, notary fees) as well as the taxation of real estate profits differ greatly from one canton to another.

Side note: Real estate gains tax

For the purposes of direct Federal tax, real estate gains are treated in the same way as other capital gains, meaning they are either exempt from tax (private assets) or they are subject to income tax (business assets of sole proprietorship/partnership) or corporate income tax (business assets of a corporation).

At the cantonal and municipal tax level, real estate gains are taxed according to either the "dualistic" or the "monistic" system, depending on the canton. This varies by canton and is not harmonized throughout Switzerland.

Dualistic system

Monistic system
As a private asset: Real estate gains tax As a private asset: Real estate gains tax
Business asset of a sole proprietorship/partnership: Income tax Business asset of a sole proprietorship/partnership: Real estate gains tax
Business asset of a corporation: Corporate income tax Business asset of a corporation: Real estate gains tax
Real estate gains tax: Taxation by canton

Monistic and dualistic taxation in the cantons 

Source: Credit Suisse

Real estate as a private asset

Holding real estate as a private asset is generally advisable if the property is owner occupied or if the holding period is very long. This also applies if the property is rented and the regular income serves as a replacement or supplement for a private pension and is needed for living costs.

Advantages

Disadvantages
  • No additional administration costs and no additional initialization costs (e.g. founding costs).
  • For long holding periods, the real estate gains tax is usually lower than the income tax or the taxation on profits and dividends (advantage in dualistic cantons).
  • Real estate profits are tax-exempt at the direct Federal tax level.
  • In cantons with an exchange flat rate, taxes can be reduced through the clever planning of major renovations.
  • In the event of an inheritance or the acquisition of a replacement property of equivalent value, a deferral of the real estate gains tax and the real estate transfer tax is possible.
  • There can be no depreciation and write-downs.
  • Losses cannot be carried forward.
  • For short holding periods, the real estate gains tax is usually much higher than the income tax or the taxation on profits and dividends (disadvantage in dualistic cantons).
  • Immediate taxation of income from the owner (no possibility of retention of profits).
  • Risk of classification as a professional realtor under certain circumstances (e.g. many transactions, development projects with subsequent sales).

Real estate as a business asset

Holding as a business asset is generally advisable if you are trading in real estate and the proceeds are to be reinvested in new properties as well as the development of real estate projects. In case of a longer holding period and a sufficiently large portfolio, a tax-neutral restructuring into a real estate company should be considered.

A reclassification of private assets into business assets can also be arranged for by the tax authorities if the requirements for professional real estate trading are met.

Advantages

Disadvantages
  • Systematic depreciation and write-downs are possible and reduce the current taxable profit.
  • Attractive options for offsetting losses over several years (only possible to a very limited extent for private assets).
  • Only actual maintenance costs are tax deductible.
  • Social taxes on the net income generated.
  • Increases in value beyond the purchase price are subject to direct Federal tax.
  • For systematic depreciation and write-downs, all deferred taxes are reversed at the time of the sale (high tax burden upon selling).

Property in a real estate company

Holding real estate in an AG (joint-stock company) or potentially a GmbH (LLC) is indicated if you are trading in real estate and the proceeds are to be reinvested in new properties. This holding form offers additional advantages compared to direct holding, especially if the capital gains and income are reinvested.

The distribution of assets in the context of succession planning can also point toward a real estate company, since company shares can easily be divided and transferred. Additionally, larger real estate projects with additional investors can also be efficiently processed through a real estate company.

In the event of a transfer of real estate from private or business assets into a real estate company, the consequences for the financing costs and capacity should be examined beforehand. In this context, lenders use different assessment criteria, for instance for the affordability of financing or for the credit rating. 

Advantages

Disadvantages
  • Depreciation and write-downs are possible and reduce the current taxable profit.
  • Attractive options for offsetting losses over several years (only possible to a very limited extent for private assets).
  • Low tax burden on the sales profit in dualistic cantons (especially for short holding periods).
  • Low-complexity sale of the AG is possible (depending on the buyer and the portfolio, it can also be tax-exempt, provided there is no economic transfer of ownership).
  • Tax progression can be influenced at the shareholder level through a dividend strategy.
  • Annual management costs and administration costs.
  • An increase in value beyond the purchase price is subject to direct Federal tax.
  • Only actual maintenance costs are tax deductible.
  • For systematic depreciation and write-downs, all deferred taxes are reversed at the time of the sale (high tax burden upon selling).

Comparison of holding forms for real estate and their tax consequences

Depending on the real estate portfolio, the transaction costs, the investment strategy, and the holding period, different holding forms are suitable. The resulting advantages and disadvantages from a tax perspective should be taken into consideration.

The following charts show the influence that the location of the property, the holding form, and the holding period can have on the tax burden. The following assumptions apply:

General:

  • Tax burden of the respective canton capital; cantonal discounts for owner-occupied real estate are not taken into account.
  • Other transaction costs, such as real estate transfer taxes, notary fees, land registry fees, etc. are not taken into account.
  • Canton-specific factors, such as alternative investment costs, are not taken into account due to a long holding period.

Business assets: Business owner is single, has no religious denomination, pays average social insurance premiums, and has the maximum BVG pensionable salary with a savings contribution of 12%; with regard to the tied retirement capital, only the projected lump-sum withdrawal taxes are taken into account; no depreciation and write-downs during the holding period.

Real estate company: The registered office of the company and the location of the property are identical to the domicile of the owner; additional wealth tax is taken into account; no depreciation and write-downs during the holding period.

Taxation of capital gains holding period 1 year

Example 1: Sale of a property with a capital gain of CHF 1 million with a holding period of less than a year

Source: Tax rates from TaxWare AG

Taxation of capital gains holding period 10 years

Example 2: Sale of a property with a capital gain of CHF 1 million with a holding period of 10 years

Source: Tax rates from TaxWare AG

Taxation of capital gains holding period 30 years

Example 3: Sale of a property with a capital gain of CHF 1 million with a holding period of 30 years

Source: Tax rates from TaxWare AG

The takeaway from the charts is that, across all holding forms, the tax burden in monistic cantons significantly decreases for long holding periods. In contrast, in dualistic cantons, the tax burden for the business asset and real estate company holding forms remain consistently high, while the private asset holding form becomes significantly more attractive over time and even drops below 5% in cantons such as Aargau, Geneva, Glarus, and Valais.

Summary: Incorporate real estate ownership in your tax planning

The only way to find out which holding form for real estate is most attractive from a tax perspective is through an individual, comprehensive analysis. In addition, investor needs can change. It is therefore advisable to reconsider the holding form from time to time. Credit Suisse experts are at your service to provide advice.

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