When two people argue, at least a third should be happy. But in the years of wrangling over the imputed rental value in parliament, there are only losers. The imputed rental value was introduced in 1934 as a "federal crisis levy" under emergency law to bolster the then ailing federal finances, and was originally limited to four years. In 1958, the imputed rental value was then incorporated into regular law. Since then, its abolition has failed several times in parliament and twice in referendums. It is quite possible that we will vote on it a third time. But before that, the National Council and the Council of States would have to agree on a compromise.
The imputed rental value is a fictitious income or natural income that homeowners must declare in their tax return and pay tax on together with their taxable income. The imputed rental value is levied on primary and second homes and is based on the market rent for a house or apartment. Taxable income increases because the imputed rental value is added. To compensate for this, homeowners are allowed to deduct their mortgage interest as well as repair and maintenance costs from their taxable income.
The tax logic: Rent-free housing is a capital gain like interest or dividends and has to be taxed as income. Furthermore, the Swiss tax system is based on solidarity and aims to compensate for the fact that tenants are not allowed to deduct their housing costs from their taxable income.
The Federal Supreme Court has set the imputed rental value at a minimum of 60 percent of the market rent. The cantons are allowed to tax a higher imputed rental value. In addition, they are free to choose the valuation method for real estate valuation, which has a major influence on the imputed rental value. Most cantons calculate with 60 percent. An example:
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Since 2017, the National Council and the Council of States have been passing the ball to each other. Their resolutions and proposals go back and forth because their positions are far apart. If the imputed rental value is abolished, the deductions for mortgage debt from taxable assets and for mortgage interest and property maintenance from taxable income would have to be eliminated or reduced. Many homeowners are opposed to this. In addition, the tax system would have to be harmonized in order to simplify the work of the tax administration and would have to apply to primary and secondary residences. The cantons with a high proportion of second homes, which fear for their tax revenues, are particularly opposed to this. The bottom line is that a lot of money is at stake: if the imputed rental value is abolished, but maintenance can continue to be deducted, as the conservative parties in the National Council are pushing for, the federal government is threatened with tax losses. Assuming an average mortgage interest rate of 2 percent, the federal administration expects tax losses of almost 1.4 billion Swiss francs per year. One quarter for the federal government, three quarters for the cantons. Therefore, only a budget-neutral solution has a chance, i.e. with cancellation or reduction of the deductions.
On June 14, 2023, the National Council approved the bill on the federal law on the change of system of residential property taxation by 107 votes to 75 with 8 abstentions. This is its resolution:
This decision largely coincides with the position of the Council of States. Except for two important points where the two chambers are still far apart:
On June 19 and 20, 2023, the Economics Affairs and Taxation Committee of the Council of States studied the proposal and is sticking to its position. It wants to eliminate the imputed rental value for primary residences only and limit the debt interest deduction to 70 percent of taxable property income.
The Economics Affairs and Taxation Committee of the Council of States has commissioned the administration to carry out calculations. The issue is probably tax losses and possible compensation for cantons with a high proportion of second homes, which are more strongly represented in the Council of States than in the National Council. The commission will discuss the bill again in August before the Council of States is expected to debate it in the fall session (from Sept. 11 to 29, 2023). Then the ball will be back in the National Council's court. If the National Council and Council of States can still agree on a compromise at some point, a referendum is likely. The Swiss would then have to vote at the ballot box on the abolition of the imputed rental value. But it will be a while before that happens.
The current initiative to abolish imputed rental value was launched in 2017. In times of low interest rates, it is easier to forego the low debt interest deduction if no imputed rental value has to be taxed in return. The higher interest rates rise, the more attractive the current tax system is for homeowners. Maybe that's why the politicians are taking so much time ...
The impact of a system change on the tax situation depends mainly on the interest rate level. At current interest rates (July 6, 2023: from 2.34 percent for a fixed-rate mortgage with a ten-year term), the deductions for debt interest are lower for most homeowners than the tax on imputed rental value. Therefore, they would benefit from a system change. With mortgage interest rates between 3 and 3.50 percent, the deductions and tax balance each other out. Only at higher interest rates would the abolition of imputed rental value be a financial disadvantage for homeowners.
More serious would be the abolition of deductions at the federal level for energy-saving and environmental protection investments. This is a contradiction between the tax system and the undisputed need to provide tax incentives for energy-efficient renovations such as facade insulation or a new heat pump to replace an old oil-fired heating system. Anyone who has not yet renovated their house or apartment to make it more energy-efficient should therefore keep a close eye on the political discussion and react if the subsidies are discontinued at the federal level.
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Different groups would benefit to different degrees from the abolition of the imputed rental value:
The system change would disadvantage buyers of old properties because they would no longer be able to deduct the costs of renovations or refurbishments from their taxable income, or only partially. Moreover, more and more construction experts assume that fewer homeowners would invest in property maintenance as soon as the financial incentive of tax deductions is removed. This could widen the price spread between new and old buildings.
