Tax Deductions for Home Renovation: Here Is What You Can Deduct

4.2.2021
  1. What is the imputed rental value?
  2. Tax deductions for debt interest
  3. Tax deductions for value-preserving expenses
  4. Tax deductions for renovations, refurbishments and conversions
  5. Tax deductions or maintenance costs
  6. Tax deductions: flat rate or effective?
  7. Divide up larger renovations
  8. New rules for energy-saving measures
  9. Bonus: seven tax-saving tips for homeowners

If you renovate your own home, you can optimise your tax burden thanks to tax deductions. As a homeowner, you pay income tax in addition to property tax. You have to pay tax on the imputed rental value if you live in it yourself, or on your rental income if you have rented out your house or apartment. In return, you can deduct the interest on your debt from your taxable income. However, with the current low mortgage interest rates, the debt interest does not compensate for the imputed rental value. This is why it is worthwhile from a tax point of view to keep your house or apartment in good condition. In addition, you maintain and protect the value of your residential property in the long term.

What is the imputed rental value?

The imputed rental value is a fictitious income and is intended to put homeowners and tenants on an equal footing for tax purposes. The value is determined by the tax office and has a great influence on your tax bill. Therefore, you should check the minutes of the imputed rental value determination when you receive them and file an objection if necessary. The imputed rental value is added to your taxable income. The higher the imputed rental value, the higher your income - and the more tax you have to pay.

Tax deductions for debt interest

You can deduct 100 per cent of debt interest from your taxable income. This also includes mortgage interest. That's why it can make perfect tax sense for you to mortgage your house or apartment at a high rate and thus pay more interest. However, the calculation only works if you can afford the interest burden and invest the additional capital profitably. For example, in home renovation, because there are tax deductions for the maintenance of residential property.

Tax deductions for value-preserving expenses

When interest rates are as low as they are now, tax deductions for maintenance are the best way to optimise your tax burden. What counts as deductible maintenance is defined by the cantonal tax administrations. All expenses for value-preserving work are deductible. This includes craftsmen's services such as plastering, painting, plumbing, carpentry or plumbing work and the replacement of old appliances or components with new appliances or components of equal value, for example a dishwasher, refrigerator or washing machine. But also service subscriptions and the building insurance premium. Expenses for value-enhancing work that improves the condition of the house or apartment are not deductible. For example, a fireplace in the living room or an extension that increases the living space.

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Good to know

All energy-saving measures increase value, but are deductible. If you install a photovoltaic system, a heat pump or energy-saving windows, you relieve the burden on the environment, save money in the long term and can deduct the expenditure from your taxable income.

Tax deductions for home renovation: Heat pump in the garden
Although energy-saving measures are considered value-enhancing investments, they may still be deducted from the imputed rental value.

Tax deductions for renovations, refurbishments and conversions

Five examples of value-preserving renovations, refurbishments or conversions that you can deduct from the imputed rental value if you effectively account for the expenditure:

  • Bathroom modernisation
  • Kitchen modernisation
  • Replace windows
  • Replace heating system
  • Renovate facade

Houzy Advice

Good to know

Condominium owners can deduct their contributions to the renewal fund as maintenance costs from the imputed rental value and thus from their taxable income in their tax return.

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Tax deductions or maintenance costs

In addition to the expenses for value-preserving conversions or renovations, you may also deduct the costs for craftsmen's services from the imputed rental value if you effectively settle the accounts, for example for the

  • Floor layer,
  • plasterer or upholsterer,
  • painter,
  • plumber,
  • carpenter or
  • plumber and
  • gardeners when they cut back over-aged plants.

Houzy Advice

Good to know

Some renovations are value-preserving and value-enhancing. For example, a bathroom renovation. Replacing components of equal value maintains the value, replacing the bathtub with a whirlpool tub increases it. You may only deduct costs for value-preserving measures.

Tax deductions for home renovation: modern bathroom
You are allowed to deduct the expenses for the new bathroom if you replace the components with equivalent value.

Tax deductions: flat rate or effective?

You can deduct the expenses as a lump sum or actually document and deduct them. You decide how to proceed from tax invoice to tax invoice. The lump sum is worthwhile in all years without major work. On the one hand, you do not have to submit receipts and invoices, and on the other hand, the settlement is easier. The actual settlement is usually worthwhile if your house or apartment is older or if you want to renovate, refurbish or rebuild. However, you must be able to list and prove all expenses in order to be allowed to deduct them. Except for energy-saving measures, only value-preserving expenses are deductible, regardless of how you deduct the costs.

Houzy Hint

Tip

For federal tax and in most cantons, you are allowed to deduct a flat rate of 10 percent for properties up to 10 years old and 20 percent for older properties. In the canton of Basel-Land, you may even deduct 25 and 30 per cent respectively. In the cantons of Appenzell Innerrhoden, St. Gallen, Vaud and Zurich, you may deduct 20 percent.

Divide up larger renovations

If you are planning an extensive renovation, refurbishment or conversion, it may make sense for you from a tax point of view to split the work and thus the costs over two years. For example, over the turn of the year. In this way you break the tax progression in two tax years and thus pay less tax on the bottom line. Talk to the craftsman and ask him to bill you in such a way that you can pay them in stages and thus spread the expenses over two years.

Houzy Hint

Tip

Depending on the canton, the invoice date or the date on which the work was carried out is decisive. Therefore, first talk to your tax advisor or someone from the tax office before placing orders and discussing financing with the craftsman.

New rules for energy-saving measures

As part of its Energy Strategy 2050, the federal government introduced new tax deductions for energy-efficient renovations on 1 January 2020. These are the two most important changes in the Real Estate Costs Ordinance:

  1. The deconstruction costs of non-refurbished buildings are tax deductible if an equivalent and more energy-efficient new building is constructed on the same plot of land in its place.
  2. Investments in energy-saving and environmentally friendly measures can be spread over a maximum of three tax years.

Thanks to the first innovation, you will receive more money if you replace an oil heating system with a heat pump, for example. Previously, you could deduct the installation costs of the heat pump from your taxable income, but now you can also deduct the costs of removing the old heating system. For most homeowners, the second change is one more argument to invest in energy-saving measures. Investment costs can now be spread over up to three tax periods instead of two or only one. If the costs exceed your taxable income, you can carry over the remaining amount to the next year or the year after and minimise your net income to zero in up to three years.

Houzy Advice

Good to know

These regulations apply to federal tax. The cantons are free to adopt these tax breaks for energy-saving measures in their tax law as well. The costs that you have borne yourself and that have not been subsidised are eligible for deduction.

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Bonus: seven tax-saving tips for homeowners

  1. Collect all receipts and invoices and calculate each year whether the actual or the lump-sum settlement of maintenance costs is more advantageous from a tax point of view.
  2. Plan more extensive renovations, refurbishments or conversions in advance and consider whether it makes sense from a tax point of view to spread the work over two years.
  3. With energy-saving measures, you do something for the environment, increase the value of your house or apartment and save money because you can deduct the expenses from the imputed rental value.
  4. Also keep all receipts for value-enhancing expenses for 20 years. You cannot deduct them from the imputed rental value, but you can deduct them from the real estate gains tax if you sell your house or apartment.
  5. Check the property tax value and imputed rental value of your house or apartment and talk to your tax advisor if you think the values are too high.
  6. Amortise your 2nd mortgage via pillar 3a. This way you can deduct the payments into pillar 3a from your taxable income in addition to the interest on the debt.
  7. If you do not use one or more rooms permanently, you can reduce the imputed rental value. For example, if your children have moved out. However, the room(s) must be empty and you must justify and calculate the unused status every year.

Houzy Hint

Tip

Talk to your tax advisor if you are unsure. If you plan your expenses correctly, you can save a lot of money.

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