What changes in terms of taxation can you expect when you become a property owner?
Becoming a real estate owner in Switzerland has significant tax implications for first-time buyers. Existing taxes may be increased or reduced and new types of tax must be taken into account. This issue is important to consider when deciding whether to keep renting or purchase your own property. In the second case, it will be important to optimize your financial arrangements for tax purposes. Explanation.
- Transfer tax – a unique tax
- Taxes related to the use of the second and third pillar as own funds
- Rental value – how buying property affects income tax
- How will wealth tax be affected?
- The newcomer – property tax
- Renting or Owning – who pays less tax?
Transfer tax – a unique tax
Real estate purchase rhymes with notary fees. This term is often wrongly used to refer to all the fees due at the time of acquisition. In fact, this sum, which is in addition to the price of the property, includes several elements. Most of them don’t end up in the notary’s pocket. Among them are:
- Land Registry fees
- Notary fees
- Mortgage guarantee/mortgage note constitution fees
- Transfer tax
It is really the last part that represents the majority of the acquisition fees. Transfer tax is also called registration tax in some cantons. It can be considered as a tax to which all real estate sales are subject.
Its amount and calculation vary according to the canton where the property is located. In Geneva, for example, it is 3% of the property price, around 2% in the cantons of Vaud and Jura, and around 1% in the canton of Valais. This cantonal tax is due by the buyer and must be covered by their own funds.
There are several rebates concerning this tax, including the Casatax in Geneva. The latter applies if the three following conditions are met:
- The purchaser must be a physical person, who will use the property as their primary residence for at least three years;
- The property must be located in the canton of Geneva;
- The purchase price must be less than CHF 1'335'749 (for 2023, the sum is indexed every year).
The amount of this rebate is usually between 15,000 CHF and 25,000 CHF and is, therefore, significant.
In some Alemannic cantons (Zug and Zurich), transfer tax does not exist. The notary establishes the authentic deeds as a cantonal public official.
To find out more about transfer tax, see our article on the subject.
Calculate my acquisition costs
Taxes related to the use of the second and third pillar as own funds
If the buyer decides to make an early withdrawal from their second pillar to fund part of their purchase, they will be taxed on this amount. The taxation rate depends on the canton and is calculated separately from income tax.
If the property owner ends up repaying the early withdrawal from their pension fund, they can recover the amount paid as tax.
The same applies in the case of a capital withdrawal from the third pillar. The main difference is that the associated tax cannot be refunded.
It should also be noted that the second and third pillars can also be pledged rather than making an early withdrawal. In this case, the amount involved is not taxable.
See our article on the tax implications of the choice of own funds for more information.
Rental value – how buying property affects income tax
Outside of investment purchases, the property owner will discover a new type of tax taxable income, in addition to existing taxable income: rental value. This fictional income corresponds to the amount for which the owner could rent their property to a third party.
It was set up during the First World War. Living in your own property is deemed more economically advantageous than paying a rent to a third party. It is considered that the economic capacity of a homeowner is increased by the amount they save by not paying rent. In a quest for socio-economic justice, the government, therefore, decided to add this amount to taxable income.
Rental value is established by the cantons, which set their own calculation rules. It must take the location of the property, living surface, year of construction, and type of construction into account. It also considers market prices and must, in principle, come to at least 60% of the rents charged.
Several initiatives are ongoing to review this system. There have been many attempts to abolish it that have arrived at the voting stage but were refused by the people.
To counteract this tax, the owner may deduct some elements related to acquisition. For example, the mortgage interest paid each month is tax deductible. As are maintenance and renovation fees. If the buyer has decided on indirect amortization for their mortgage loan, their contributions are also deductible.
There are, therefore, strategic choices to be made when constituting a financial plan for a mortgage loan.
Find out more about our financing strategy
How will wealth tax be affected?
The new owner must declare their property to the tax authorities. The fiscal value of the property will be added to the wealth of the taxpayer.
In general, the fiscal value initially corresponds to the purchase price. Then, an annual abatement reduces it every year. It ends up being lower than the current value of the property.
In the canton of Geneva, for example, the vale of a property to be declared on tax returns reduces by 4% every year. It can reach a minimum of 60% of the purchase price after 10 years of ownership.
Wealth tax is applied to net wealth once the mortgage debt has been deducted. In reality, the amount of this tax will not change significantly. Indeed, own funds invested in the purchase, if they come from the purchaser’s bank-based wealth, will not be taxed. The taxation rate is usually progressive and comes to 1% of net wealth in Geneva.
To take a simple example, let’s look at a property worth 1,000,000 CHF. To make things simple, imagine that the buyers have used their bank wealth to cover 20% of the own funds. They, therefore, have a mortgage debt of 800,000 CHF.
- Before buying, wealth tax applies to 200,000 CHF own funds.
- After the purchase the 200,000 CHF is no longer in the account. Wealth tax applies to the fiscal value of the property, say 950,000 CHF less the mortgage debt, so 150,000 CHF.
In reality, wealth tax may even be reduced. The larger the debt, the greater the effect.
However, if own funds come mostly from the buyer’s second or third pillar, wealth tax will increase. Indeed, this capital is not taxable before retirement.
The newcomer – property tax
There is another tax to be added. It is based on the gross value of the property before the debt is taken into account. Property tax is calculated differently depending on the canton and comes to between 0% and 0.3% of the fiscal value of the property. Some cantons do not levy it (Zurich and Zug, for example).
Renting or Owning – who pays less tax?
This is an interesting question. It will be important like the difference between the cost of renting and the monthly payments made after buying.
Many factors must be considered in this calculation:
- Annual taxable income
- Property value
- The canton
- The amount of debt
- The provenance of own funds
Taking the above example again, let’s imagine that the new owners have a taxable income of 190,000 CHF.
They buy a villa for 1,000,000 CHF in the canton of Vaud. Its rental value is estimated at 20,000 CHF per year.
They finance this purchase with a debt of 800,000 CHF with an interest rate set at 1.5%. They, therefore, pay 12,000 CHF in interest every year. We estimate maintenance costs at 0.5% of the value of the property or 5,000 CHF per year.
Changes to income tax
The new taxable income will, therefore, be as follows:
- Taxable income before acquisition + rental value - mortgage interest - maintenance costs
- 190,000 CHF + 20,000 CHF - 12,000 CHF - 5,000 CHF = 193,000 CHF
Income tax will, therefore, increase slightly.
If the buyers use indirect amortization through a third pillar service, for example, the calculation is a little different. It just means adding the deductible share of the amount that goes through this amortization. This would be around 10,000 CHF per year.
The new taxable income will, therefore, be as follows:
- Taxable income before acquisition + rental value - mortgage interest - maintenance costs - amortization
- 190,000 CHF + 20,000 CHF - 12,000 CHF - 5,000 CHF - 10,000 CHF = 183,000
This time, income tax will be lower.
In our example, transfer tax stood at around 30,000 CHF in the canton of Vaud. If the property was in Geneva, transfer tax would be about the same. However, the Casatax would apply and allow a rebate of almost 20,000 CHF.
As we have seen above, if the buyer uses their bank wealth to fun their property, wealth tax will go down slightly:
- Taxable wealth after taxation = taxable wealth before taxation - own funds used for property purchase + fiscal value of the property - mortgage debt
- Taxable wealth before taxation - 200,000 CHF + 950,000 CHF - 800,000 CHF = Taxable wealth before taxation - 50,000 CHF
Transfer tax remains to be integrated into the acquisition cost and property tax of around 1,000 CHF.
The difference between before and after the acquisition is relatively small. There also exist many possibilities for optimizing the mortgage loan even further in terms of taxation. Among them, as demonstrated above, is the possibility of using indirect amortization. This option is very beneficial fiscally. Indeed, payments to a third pillar account can also be deducted from income tax.
The question of whether is it wiser to continue renting or become a property owner is not limited to these tax considerations. You also need to compare the rent paid compared to the financial charges that an acquisition entails. An apartment with a value of 1,000,000 CHF may be rented for 3,000 CHF per month but cost less than 2,000 CHF in monthly payments.
And of these 2,000 CHF, all of the amortization part can be considered as savings rather than expenses.
In any case, it is your project that counts as, usually, a property purchase is about more than just reducing tax. However, getting good support in identifying the most suitable financial package, amortization strategy, and use of own funds remains key for any acquisition.
Our team of mortgage advisors work proactively with our tax and pensions experts to help you optimize your mortgage loan.