Residential property is taxed several times in Switzerland: the value as taxable assets and the imputed rental value as taxable income. In return, mortgage debt can be deducted from income and housing costs can be deducted from income. In addition, more than half of the cantons levy a property tax of 0.1 to 0.3 percent of the property value. And if a property is sold at a profit, they also tax the property gains.
The imputed rental value is controversial. We explain why it is taxed, how to calculate the imputed rental value, how you can contest it if necessary and why it may soon be abolished.
The imputed rental value is a notional income or income in kind. Anyone who lives in their own house or apartment must pay tax on the imputed rental value as income. Like property and wealth tax, it is levied on primary residences and occupied second homes and is based on the market and local rent for comparable properties. Anyone who owns a vacation home in the mountains or a vacation apartment in Ticino and rents it out temporarily can reduce the imputed rental value proportionately, but must pay tax on the rental income.
All homeowners who live in their own house or apartment are liable for tax. Regardless of whether they live there permanently or not. It is sufficient if the property is permanently available to them. This is why vacation homes and apartments are also taxed. If a homeowner grants someone a right of usufruct or right of residence free of charge, the tax liability is transferred to the beneficiaries, who must pay tax on the imputed rental value.
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Our tax system is based on solidarity and should avoid unequal treatment. The imputed rental value should put homeowners and tenants or homeowners and landlords on an equal footing:
The Federal Law on Direct Federal Tax defines in article 21, that income from immovable property is taxed. This also includes "the rental value of real estate or parts of real estate that are available to the taxpayer for personal use on the basis of ownership or a right of use free of charge". In addition, the cantons regulate taxation in their tax laws. In Zurich, for example, the imputed rental value is limited to 70 percent of the market value (Art. 21 para. 2 let. a) and quality features such as age or building fabric must be taken into account appropriately in the calculation (Art. 21 para. 2 let. b).).
The Federal Supreme Court has set the imputed rental value at a minimum of 60 percent of the market and local rent for a comparable property. The cantons can set the imputed rental value higher and are free to choose the method for determining the rent as the basis for the imputed rental value:
The Confederation and cantons set the imputed rental value lower than the market value to promote home ownership. The imputed rental value should not fall below 60 percent. In the case of direct federal tax, the tax administration ensures that the cantonal average does not fall below 70 percent.
For the federal tax, the Confederation only accepts the tax values of the cantons of Appenzell Ausserrhoden, Fribourg, Geneva, Jura, Lucerne, Neuchâtel, St. Gallen, Uri, Ticino, Valais, Zug and Zurich. As a rule, surcharges or small discounts are levied for the other 14 cantons.
In the canton of Zurich, the imputed rental value is calculated at 3.5 percent (single-family homes) or 4.25 percent (condominiums) of the taxable value. The taxable value is 70 percent of the market value. In our example calculation, Angela and Nick own an apartment in Winterthur worth CHF 1.25 million, which they have financed with a mortgage of CHF 1 million. The newly married couple do not yet have any children and earn 180,000 francs a year.
The imputed rental value increases Angela and Nick's annual tax bill by CHF 1,203. In years with major value-preserving and/or energy-efficient renovations, they could deduct the actual maintenance costs and thus optimize their tax burden. We have calculated the estimated tax burden using the Federal Tax Administration's tax calculator.
In our article "Deductible Property Maintenance Costs: How to Reduce your Tax Burden" you can find out which costs you can deduct in your tax return.
If you live away from home during a renovation, you may be able to reduce your imputed rental value proportionately. For example, by 2/52 if the renovation lasts 2 weeks. However, the cantons handle the deduction differently. In many, it is sufficient if the house or apartment is uninhabitable. Bern also accepts the deduction if the property was partially habitable, while Aargau, Basel-Stadt, St. Gallen, Thurgau and Zurich do not. In the canton of Thurgau, the house or apartment must be vacated; in the canton of St. Gallen, the costs for the external accommodation must be proven.
If, for example, two children move out and a room is permanently empty, homeowners can claim an underutilization deduction from the federal government and in these 10 cantons: Basel-Landschaft, Graubünden, Nidwalden, Obwalden, Schaffhausen, Schwyz, St. Gallen, Uri, Zug and Zurich. However, the room must be completely empty and may not be used as a storage room, hobby room or guest room. Most cantons adhere to the federal government's calculation:
The deduction for unused property can only be claimed for a main residence, not for secondary residences such as vacation homes or vacation apartments.
Homeowners who take up a position in Lugano, for example, must continue to pay tax on the imputed rental value of their house or apartment in Zurich, even if they live in Ticino. There are two exceptions:
However, the chances of a reduction are slim, as housing in general (exception 1) and affordable housing in particular (exception 2) are in high demand in Switzerland.
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The tax authorities periodically reassess the imputed rental value. Discussions usually only arise when the imputed rental value is increased. If the increase is justified by the rise in property prices, there is no chance of an objection. The situation is different if the value has been set too high or the tax authorities have made a mistake:
In the cantons of Geneva, Graubünden, Lucerne, Obwalden, Schaffhausen, St. Gallen, Vaud and Zurich, there are hardship clauses for homeowners on low incomes, such as pensioners. If the imputed rental value exceeds a certain percentage (usually one third) of income, it is reduced. In Lucerne and St. Gallen, however, it may not fall below 60 percent.
The objection is free of charge. As soon as it goes to court, it gets expensive. The loser bears all the costs, for example for an expert opinion that costs several thousand francs. Seek an amicable settlement and weigh up the opportunities and risks before taking legal action.
The abolition of the imputed rental value has been under discussion for some time. The proposals have been going back and forth between the National Council and the Council of States since 2017. After six years, the positions have converged to such an extent that an agreement seems possible. On June 14, 2023, the National Council adopted the draft Federal Act on the System Change in Home Ownership Taxation. Now it is the turn of the Council of States' Committee for Economic Affairs and Taxation. It will discuss the bill before it is likely to be debated in the Council of States in the fall session of 2023. Should the National Council and Council of States agree on a good Swiss compromise, a referendum is likely. The abolition of the imputed rental value is no longer as attractive as it was in 2017, when interest rates were significantly lower.
At the current mortgage interest rates, the debt interest deductions are still lower than the imputed rental value tax. For mortgage interest rates between 3 and 3.50 percent, the deduction and tax are balanced. Only at interest rates above 3.50 percent would the abolition be a financial disadvantage for homeowners. It doesn't look like that at the moment. More serious would be the abolition of deductions for energy-saving and environmentally friendly investments in direct federal tax. Anyone who has not (yet) renovated their house or apartment to make it more energy efficient should follow the political debate closely and act quickly if the federal subsidy is abolished.
