Correct real estate taxation – how to make tax savings

Property owners must pay taxes – that is the basic principle. Taxes in Switzerland are lower than in other countries, but no less complex. The following article provides an overview of the different taxes on real estate in Switzerland.

Real estate transfer tax

Tax is payable if the title right to a property is transferred from one person to another: This is known as real estate transfer tax. It is a fee based on the property transaction. In Switzerland, this fee is levied in most instances by the cantons and sometimes by the municipalities, but not by the federal government itself.

In some cantons, such as Zurich, Glarus, Zug, and Schaffhausen, real estate transfer tax is structured like a fee and is linked to the fees for entries in the land records. In most other cantons, however, this tax is treated either as a conventional tax or as a combination of tax and fee.

Wealth tax

Real estate is classified as a taxable asset and must be taxed as such. The key factor here is the taxable value, which is calculated in various ways depending on the canton. The basis is usually the market value. Mortgage debt reduces taxable assets and can therefore lead to a lower tax burden.

Real estate tax

Some cantons and municipalities also levy a real estate tax, referred to alternatively as property tax or land tax. With this scenario, the full taxable value of the property must generally be specified. There are no deductibles available for mortgage debt.

How is the taxable value of a property calculated?

The taxable value must be calculated before real estate tax and wealth tax can be determined. This calculation is carried out directly by the authorities. The calculation can vary considerably from canton to canton – a detailed breakdown is given in the respective cantonal guidance on tax returns. As a rule, the taxable value of a property, at 20–40%, is significantly lower than the actual market value.

Imputed rental value

In Switzerland, property is not taxed only as an asset. Imputed rental value means there is also a tax on theoretical income. Imputed rental value is a notional taxable income and is intended to level the playing field for tenants and homeowners. However, certain deductions can be claimed and these reduce the tax burden.

Making tax savings with real estate

The following options exist for tax deductions on real estate:

Making tax savings on the imputed rental value

In terms of the imputed rental value, homeowners can deduct mortgage interest, maintenance costs, and insurance premiums for the property from the taxable income. Anyone with an owner-occupied apartment can also declare the management costs and payments into the renovation fund. Note that tax deductions for owner-occupied homes must be documented in full. A flat-rate deduction can be claimed as an alternative to the actual maintenance costs.

Tax deductions for investments in energy measures

Value-enhancing energy-saving measures can also be deducted from taxes. This includes fitting a solar installation or a heat pump, and renovation of the facade insulation. In many cantons, it is also possible to claim a tax deduction for demolition expenses, i.e. for demolition and removal of debris and for dismantling old installations as part of an energy renovation.

Tax deductions when renovating an owner-occupied home

Renovations are a particularly interesting proposition from a tax perspective. Expenditure should be carefully planned, since a tax deduction can only be claimed in the calendar year in which the costs are incurred. If you stagger work on an owner-occupied home over several years, you can benefit from a tax deduction for a longer period of time. This kind of staggered approach can be particularly interesting if you use it to break the tax progression, as a result of which the tax rate is disproportionately higher the more you earn. The bottom line is that the amount saved is therefore greater if the investment is made in stages rather than all at once.

However, only value-preserving expenditure is deductible. Installing a hot tub, for instance, is not deductible, since it adds value. The exception is investments to increase energy efficiency. So a solar installation can be claimed as a tax deduction if it adds value to an owner-occupied home. Expenditure that adds value is therefore relevant from a tax perspective when the property is sold – it reduces the real estate gains tax.

Indirect repayment for bigger tax deductions on an owner-occupied home

One other way to make tax savings is indirect repayment for a property that you use yourself. Instead of paying off the mortgage directly, the repayment amount due is paid into Pillar 3a. The mortgage is only repaid after the end of an agreed term or at the latest when retirement age is reached.

This is an attractive option from a tax perspective, since with indirect repayment the entire mortgage debt can still be deducted from the taxable assets. In addition, the amount paid into Pillar 3a reduces the taxable income. Taxes are only due on withdrawal, i.e. when the mortgage is redeemed. However, this amount is then taxed separately from the remaining income and at a reduced rate.