Probably one of the most controversial taxes in Switzerland: the taxation of the imputed rental value as income. The question affects everyone who owns and uses real estate. How is it calculated? How does it vary between cantons? How likely is it to be abolished?
Imputed rental value is a purely notional income. Many people still struggle to understand this system. Why should this value be taxed as “income” when the person concerned never sees a single franc of it? How can this be right?
In Swiss tax law, income is defined very broadly: not only is income in cash subject to taxation, but also income in kind. In the case of owner-occupied property, this means: the owner pays taxes on the benefit they derive from owning a property. The amount of tax depends on the rental income that could be achieved if a comparable property were to be rented to a third party.
Imputed rental value goes back a long way. Governments have levied it in times of crisis, such as in 1915 and during the Second World War. In other words, this was originally a “crisis” or “war” tax. In 1958, taxation of imputed rental value became part of ordinary law.
Let’s take Mr. and Mrs. Schweizer in Zurich as an example: Their taxable income is CHF 130,000. Ten years ago they bought an old detached house in a forest for CHF 1 million. In this example and to keep things simple, we will assume that the taxable value and the purchase price 10 years ago are identical.
In Zurich canton, imputed rental value is calculated as follows:
Imputed rental value = 3.5% of the land value and fair value of the property = CHF 35,000.
For detached homes, the Zurich tax authorities use the formula 3.5 percent of the land value and fair value of the property. For owner-occupied apartments, the figures is 4.25%.
The bill is easy to calculate: imputed rental value is added to earned income. The total income on which the Schweizers have to pay tax is CHF 165,000.
The question remains as to what exactly is meant by land value and fair value of the property. In simple terms, the canton calculates the value of the land according to the municipality and the location category. The fair value is equivalent to the new-build costs minus depreciation.
The Zurich tax authorities calculate the land values based on a directive and figures dating back to 2009. The fair value is based mainly on the new build costs, which are indexed to increases in building costs minus depreciation of the building.
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Most cantons use similar methods as Zurich canton. These are based on uniform cantonal property appraisals. Each canton has its own terms for this, e.g., “taxable value,” “assessed land registry value,” “assessed property value,” etc. While the Zurich method is static and follows a defined formula, the canton of Bern, for example, supplements the assessments with current data from rent statistics. The following three basic approaches are employed throughout Switzerland:
Official estimates are based on the specifics of the properties: location is important, then the living space, age, standard of finishing, construction method and surrounding area.
Until now, many cantons have only updated the calculation bases and thus the imputed rental values infrequently. In the wake of rising real estate prices and market rents, the pressure on cantons to raise imputed rental values is increasing. The Federal Supreme Court stipulates that imputed rental value must be at least 60 percent of the market rent. The same applies to second homes and vacation apartments, even if they are not permanently used. Most cantons aim for imputed rental values of between 60 and 90 percent of market rents, thus granting a certain reduction.
Doesn’t this complex system mean that homeowners pay more taxes than renters? That would violate the principle of equal treatment. But this is not the case: homeowners can also claim various deductions. These include mortgage interest, value-preserving maintenance measures such as painting or plumbing work, insurance premiums, service subscriptions for appliances, energy-saving expenses and more. Only investments that increase the value of the property are considered to be non-deductible maintenance.
Most owners are therefore guided by tax considerations when making decisions on mortgages, the percentage of borrowed capital and building maintenance. For higher-rate tax payers in particular, it makes little sense to pay off all mortgages and loans. Those who take building maintenance seriously and spread spending on renovation across different tax years will often be able to reduce or even avoid paying imputed rental value tax.
The valuation rules and official comparative figures are not readily available to ordinary people. Often they are based on a complex and elaborate method developed over a period of years. However, the following principle applies: The imputed rental value must be based on the realistically achievable rental income for a specific property.
Let’s return to the Schweizer family: Let’s assume we are dealing with five identical detached houses on the same street, three of which are rented out. The Schweizers would then have a valid reason to contest the imputed rental value if the objectively proven comparative rents were significantly lower.
In practice, however, finding comparable properties is often difficult. In practice, houses and apartments that are identical in type are rare. Comparison may also be impossible because the owners are not willing to disclose the rents. In practice, the following applies: it is often difficult to contest official imputed rental values.
Nevertheless, challenging the imputed rental values shown on the tax form may still be worthwhile. Especially in the large cantons, the authorities have to assess hundreds of thousands of properties. Mistakes do happen quite frequently. Perhaps the authority made an error regarding retroactive changes or when assessing a home addition, be it about the size of the plot of land or the home itself. It’s worth checking the details. Depending on the canton, a reduction is possible if the house is very under-occupied (for example, after the children have moved out). What happens in practice depends on the rules of the individual canton. The authority will not readily accept the so-called “under-use deduction,” especially if empty spaces can still be used for storage or as hobby rooms.
In 2017, there was movement in the discussion about imputed rental value. The Economic Affairs and Taxation Committee (EATC) introduced a parliamentary initiative. The goal of fundamental system changes and abolition at first met with great acceptance.
Taxation of imputed rental values on a primary residence was to be dropped both at federal and cantonal level. As a concession to tourist regions and mountain cantons, however, imputed rental value would continue to apply to second homes or vacation properties. A majority also seemed to be in favor of promoting home ownership to a certain degree; specifically that first-time buyers should be able to deduct mortgage interest to a limited extent and for a limited period of time. However, until now no consensus could be reached on the details. The same applies to the question of deductions for building maintenance and in particular to the deduction of mortgage interest.
Earlier this year, the Commission for Economic Affairs and Taxes of the Council of States (WAK-S) discussed the dossier again. There is currently no consensus in sight on key issues such as debt interest deductions, which are to be permitted in future.
Although the majority of the Commission agreed to abolish imputed rental value, they also demanded the complete cancellation of debt interest deductions. According to this proposal, only first-time buyers of residential property would be able to deduct small amounts of mortgage interest and for a limited period. For everyone else, there would be no deduction of debt interest at all, not even for individuals with vacation apartments or owners of rented apartments.
The latest statements of the Federal Council in August 2021 and the responsible committee in the Council of States show opinions still diverge widely. For example, there is no consensus about future tax relief on debt interest or on whether the imputed rental value should also be abolished for vacation properties.
Whether there will be any change to the system remains to be seen. The parliamentary deliberations and a potential referendum could drag on for another two or three years. The future of imputed rental value is therefore still uncertain.
