The road to owning property can sometimes be strewn with obstacles. There are many stages between deciding to purchase a property and taking possession of it. Financing capacity, the choice of own funds, tax implications, and choosing the property in question are all factors that should be analyzed before making a purchase. 

To inform our readers on the various steps of financing associated with a real estate purchase, we publish a series of articles, written in collaboration with our specialist legal and tax partners. In these modules, we highlight the key stages and the traps that a careful buyer must be wary of.

Module 1: The choice of own funds and its tax implications

In principle, buying a property as a primary residence requires the mobilization of 20% of own funds. Own funds must usually be paid in full on the day the property is purchased (if it already exists) or on the day of the simultaneous signature of the purchase of the land (or share of the land) and a construction contract. 

Own funds can come from (i) private savings, (ii) a donation (anticipated inheritance), (iii) a payment in capital from the third pillar A and/or B, or (iv) from a payment in capital from the second pillar. It is also possible to use the capital of the second and third pillar as security (collateralize your assets) instead of a withdrawal.

The rules imposed on financial institutions by the FINMA state that financing for a real estate purchase must be made up of at least 10% of own funds from your savings (excluding work-related pensions) i.e. the sources mentioned in figures (i), (ii), or (iii) above. There are a few rare exceptions in which you can only mobilize own funds that come from work-related pensions.

Conditions for using the second pillar for purchasing housing

Your second pillar can be used under the following conditions:

• It must be your primary residence (purchase of existing or off-plan housing);
• You can only finance a single property at a time;
• If you are married, the payment is only possible with the written consent of your spouse;
• You can only request a payment every five years for a minimum amount of 20,000 CHF per withdrawal (except for vested benefit accounts);
• The payment must be requested at least three years before retirement age (some pension funds accept a later payment);
• You can only withdraw the capital you have accumulated up to the age of 50. After 50, the amount you can withdraw in cash is limited;
• The second pillar must be used at most three years before retirement.  

It is important to stress that partial or complete withdrawal from the second pillar will result in a reduction in future pension services. Below, we will see how this gap can be filled.

If you sell your property, the sum that came from the second pillar must, in theory, be repaid into your pension fund.

Conditions for using the third pillar A for purchasing housing.

You third pillar A assets may, in principle, be used under the following conditions:

• It must be your primary residence (purchase of existing or off-plan housing);
• You can only finance a single property at a time;
• If you are married, the payment is only possible with the written consent of your spouse;
• It is only possible to request a payment every five years (the amount is not limited).

It is important to note that a partial withdrawal made in the five years preceding retirement may result in taxation of all old-age benefits.

Contrary to the conditions for the second pillar, if the property is sold, there is no obligation to refund early payment.

Pledging pension capital

Instead of withdrawing capital, you can also pledge your pension assets (second pillar) or your third pillar A and/or B.

Pledging does not replace the requirement to contribute 10% of own funds from your savings.

It involves no withdrawal of money or reduction in service and, therefore, has no immediate tax implications. It often allows you to obtain better financing conditions.

Pledging is only possible in the cases mentioned above for the second pillar or third pillar A. 

In practice: The tax implications of using the second or third pillar when purchasing housing in Geneva

Early pension withdrawal (second pillar or third pillar A) is taxed separately from other income. 

In the canton of Geneva, the tax rate for such a payment corresponds to a fifth of the tax rate. This is also the case for federal income tax.

Here is an example to explain:

Mr and Mrs Dunand, aged 35, wish to buy a property valued at 1,500,000 CHF. They will, therefore, need at least 300,000 CHF of own funds.

Half of these own funds come from a donation (anticipated inheritance) from the parents of Mrs Dunand to their daughter. As this is a direct donation between taxpayers in Geneva, it is not subject to income tax.

As taxation on donations and inheritance is not harmonized on a federal level, each canton is free to set tax rates and exceptions. You need to pay attention to the tax domicile of the donor. For example, direct donations are taxed in the cantons of Vaud and Neuchâtel.

The other half comes from the early payment of Mr Dunand’s pension (second pillar). The amount of 150,000 CHF is, therefore, taxed separately – separate taxation of a couple’s other income and application of a rate corresponding to a fifth of the taxable income. The tax invoice related to this withdrawal is around 6,700 CHF (ICC and IFD) or a tax rate of around 4.4%.

It is useful to underline that before being able to buy back deductible BVG, Mr Dunand must repay the withdrawal amount. Repayment must occur in portions of at least 10,000 CHF. In the case of repayment, the tax paid upon early withdrawal is refunded.

Finally, be careful not to trigger early withdrawal in the three years following BVG redemption that gave rise to a tax deduction. In this case, the tax administration will call into question the already granted tax deduction with an income tax recall procedure.

The information contained on this website is for information purposes only. This information can in no way be construed as a recommendation, invitation, or offer to conclude a contract, nor to purchase or sell real estate.