The Swiss Property Owners Association wants to abolish the imputed rental value. A range of different motions have already been made in the Federal Assembly, but what exactly is imputed rental value and how is it calculated? Not every homeowner would benefit from the imputed rental value being abolished.
The imputed rental value is a notional taxable income. It was introduced as part of the federal tax, which was collected as national defense tax during the Second World War. Homeowners pay tax on all rental income that they would receive if they were to rent out the property.
At first this sounds absurd: Why tax someone for income that they have not received? Closer examination shows that the imputed rental value aims to achieve a balance between tenants and homeowners in terms of the taxes they pay. This is because those who own a house or apartment usually live more cheaply than if they rented the same property. In accordance with Switzerland's solidarity tax system, real estate owners are therefore required to pay more.
Deductions Reduce the Impact of the Imputed Rental Value
Imputed rental value and tax progression mean that homeowners pay significantly more income tax than tenants. At least it seems this way at first glance. Real estate owners can actually deduct both mortgage debt and living expenses from their taxes, which makes it attractive to not pay off mortgages but to instead be indebted to the bank.
All value-preserving expenses may also be deducted from tax. Repairs and renovations are classed as value-preserving expenses. This does not include any value-enhancing expenses, such as your new luxury kitchen or your new sunroom. Thanks to these deductions, the extra tax burden from the imputed rental value is decreased – or under certain circumstances is canceled out entirely.
How Imputed Rental Value Affects Taxes
Example 1: Young family (mother, father, 2 children)
Imputed rental value = 3.5% of land value and fair value of property = CHF 63,000
- Taxable income of CHF 150,000
- Older house in Uster bought for CHF 1,200,000 (assumption: purchase price = land value and fair value of property)
- Mortgage of CHF 960,000 (80% of the purchase price)
- Mortgage interest rate is 1.5%
- High maintenance costs, given age of house
Imputed rental value = 3.5% of land value and fair value of property = CHF 63,000
- mortgage interest costs = CHF 14,400
- maintenance costs (effective) = CHF 40,000
results in additional taxable income of CHF 8,600
Income tax excl. imputed rental value: CHF 24,744
Income tax incl. imputed rental value and deductions: CHF 27,478
Change in event of a rise in interest rates: assuming interest rates on the mortgage rise again to 4% (interest rates on a 15-year mortgage were last at that level in 2010), the mortgage interest cost rises to CHF 38,400. In this case, the young family's income tax incl. imputed rental value and deductions falls to CHF 20,127.
Example 2: Retired married couple
- Taxable income of CHF 110,000
- Owner-occupied apartment in Uster worth CHF 880,000 (assumption: value = land value and fair value of property)
- Mortgage of CHF 528,000 (60% of value)
- Mortgage interest rate is 1.5%
- Maintenance costs based on flat-rate method
Imputed rental value = 4.25% of land value and fair value of property = CHF 37,400
- mortgage interest costs = CHF 7,920
- maintenance costs (flat rate) = CHF 7,480
results in additional taxable income of CHF 22,000
Income tax excl. imputed rental value: CHF 14,464
Income tax incl. imputed rental value and deductions: CHF 19,904
Change in event of a rise in interest rates: assuming interest rates on the mortgage rise again to 4% (interest rates on a 15-year mortgage were last at that level in 2010), the mortgage interest cost rises to CHF 21,120. In this case, the retired couple's income tax incl. imputed rental value and deductions falls to CHF 16,504.
How Is the Imputed Rental Value Calculated?
Various criteria such as the property's habitable floor area, location, construction, and age are taken into account when calculating the imputed rental value. The tax authority compares or estimates how much rent is paid for a similar property. A reduction of 10 to 40 percent is then applied. The calculation of imputed rental value depends on the place of residence and can differ greatly from canton to canton. For federal tax, a standardized and therefore sometimes higher estimate is used.
If a homeowner believes that the imputed rental value is too high, they can dispute the calculation. Spaces that are unused (because children have moved out, for example) can also lead to a reduction in the imputed rental value.
Homeowners Want to Abolish the Imputed Rental Value
The imputed rental value is controversial. Many homeowners perceive it to be unfair. On several occasions there have been attempts to abolish it, and today the chances of this happening are higher than ever before. "The chances are 60:40 in favor of abolition," says Fredy Hasenmaile, Head of Real Estate Analysis at Credit Suisse.
However it is still uncertain whether, along with the imputed rental value, opportunities for deductions will also cease to apply and how second homes will be taxed in the future. Depending on how the imputed rental value is abolished, there will be various financial consequences for homeowners.
The Abolition of Imputed Rental Value Will Not Benefit Everyone
If the imputed rental value were abolished, two factors are decisive for homeowners with high mortgages: Firstly whether they can still deduct their mortgages, and secondly how high the mortgage interest rate would be. Higher interest rates make it worse for these homeowners, both if the imputed rental value is abolished and if an end is put to deductions. The same also applies for owners who invest a lot in maintaining their property. However, a vote for abolishing the imputed rental value alone may barely gain a majority in the Federal Assembly.
In sum: The current tax model with the imputed rental value makes it appealing not to pay off mortgages. If the imputed rental value is abolished along with opportunities for deductions, having high levels of debt will become unattractive. In this case, long-term homeowners with low mortgages will benefit more than average from the imputed rental value being abolished, as they would have to pay less tax. For new buyers, however, the abolition of opportunities for deductions may present a financial hurdle.
Source:
Credit Suisse Group AG Zürich | Switzerland
Link to the article:
https://www.credit-suisse.com/ch/en/articles/private-banking/eigenmietwert-das-muessen-sie-wissen-201804.html
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