Do you know how you can reduce your tax burden totally legally? If you read the instructions from the cantonal tax authorities very thoroughly and consistently take advantage of all opportunities for deductions, you can quickly reach a few thousand Swiss francs. Those who own their own homes or condos must pay taxes on the imputed rental value, but it is also important not to forget any deductible expenses.
Once a year, generally when springtime is at our door, many people resign themselves to filling out their tax return. Of course, we would all prefer to do something more pleasant with this Sunday afternoon than hunt for bills in a stack of papers and sort out receipts.
In contrast, those who organise their finances well and have a separate place to keep records of expenses and invoices over the course of the year can certainly make their own lives much easier. Simply getting this paperwork together is half the job. If during the past year you hired someone to paint your home or had your kitchen renovated, you can cut your tax bill thanks to the ability to write their work off as a deduction. By doing so, several thousand Swiss francs can quickly accumulate, and this each year.
Lower mortgage interest payments – what to do?
A very important expense item for homeowners is mortgage interest they pay; this debt interest is deductible and reduces the amount of income which is taxed. Yvonne v. Kauffungen from the Canton of Bern Tax Office explains the principle: «It does not matter whether the homeowner in question has used the borrowed money to buy a car or anything else. It also does not matter if the home he purchased is owner-occupied or rented out.»
Because interest rates today are only roughly half as high as they previously were, you have considerably less interest paid out to show on your tax return. In this regard, Pavlo Stathakis, an attorney at the Swiss Homeowner’s Association (HEV Schweiz), says, «Not only is that the case, at the same time imputed rental values have risen in many cantons.» HEV estimates that lower interest rates have bumped up tax revenues by billions. In this context, rental value essentially means the use you gain from occupying your own property (house or condo). This rental value is then taxed as fictitious additional income. In early 2015, a large number of communities in the Canton of Bern increased the imputed rental value, and the same happened in the Canton of Aargau in early 2016. According to HEV, there are many debatable questions related to increasing the imputed rental value. For instance, compare that trend to the fact that actual rental prices on the open market have not risen but instead have tended downwards because the reference interest rate for mortgages has dropped.
According to a ruling by the Federal Supreme Court, it is permissible to have the imputed rental value be lower than what could be realised if the property were rented out. However, it must be at least 60 per cent of the receipts possible if the property were rented on the open market. In the case of the direct federal tax, the minimal value is 70 per cent of the possible rental income. Getting a reduction in the imputed rental value is possible only in rare exceptions, and the best approach is to investigate what has been the practice in your canton. The Canton of Zurich, for example, recognises a clearly defined «hardship provision» which is applicable if a taxpayer’s disposable income is obviously in an unfavourable ratio compared to taxable income.
Reduce taxes by maintaining value
If you want to cut your tax bill, keep every possible deduction in mind. A basic rule is this: building maintenance, value-maintaining measures and repairs can be deducted 100 per cent. Every tax expert will of course note the limitations; authoritative is what is the practice in each individual canton, and this can be found in the information sheets from the respective tax offices. In general, deductible «building maintenance» includes everything needed to bring a building back to its original condition. In other words, this means replacing existing components, materials and appliances with new ones of similar value – simply everything which keeps the property in a usable condition where it could yield a return.
A characteristic feature of «maintaining value» is generally doing a given task with a certain amount of regularity, examples being work done by painters, plumbers, plasterers along with most garden services. Replacing a broken pane of glass with a new one of similar value is, of course, also deductible. Furthermore, you can include service contracts for heating systems and other equipment such as a washer/dryer. Be sure not to forget other additional expenses during the year which are related directly to your property: property insurance (fire, water, glass) and property owner’s liability insurance, helping with street repairs and the like – when you add everything up, it can certainly mean lower taxes. Such expenses are 100 per cent deductible.
Flat rate or the actual expenses?
If during a given year the running expenses are somewhat low, you should check to see if you should elect to take a flat rate standard deduction instead of the actual expenses. At the federal level and in almost every canton you can choose between
- taking the actual expenses OR
- applying a flat-rate maintenance amount (generally 20 per cent of the imputed rental value).
You can choose in advance for each tax period which method you would like to use. This is a relatively generous way to help reduce your taxes.
Things not considered deductible maintenance include expenses that belong to the actual cost of living. Accordingly, examples of non-deductible items are costs for fuel and electricity, household contents insurance, fees for the telephone, radio and TV as well as expenses for water and waste water.
Likewise non-deductible are expenses related to the purchase or sale of a property such as estate agent fees, real estate transfer tax, land registry fees and notary fees.
A key differentiation must be made between the normal, periodic building maintenance expenses already mentioned and value-adding investments. To name a very typical example for value-added: if you install a sauna, your own swimming pool (as long as this did not already belong to the property) or if you build an addition to your home, the tax authorities consider any of them value-added measures for tax purposes. In other words, something new which was not there before has been added. Any such items are not included in deductible building maintenance expenses.
It is important to realise, though, that these expenditures will later be taken into account when calculating the real estate profit tax. Anything you have invested during the time you own the property will reduce the amount of profit you are taxed on when you eventually sell the property. These expenditures can be applied 20 years or even later! It is thus highly recommended that you keep careful records of all value-added expenditures and make sure always to keep it up to date. This will be important if you want to cut taxes over the long term.
In practice, questions often arise when a condo is not owner-occupied but is instead rented to a third party. In such cases, the following expenses are deductible:
- mortgage interest payments
- all maintenance expenses such as painting the condo, etc.
- general administrative expenses related to the condominium association
- deposits in a renovation fund (to the extent building maintenance is financed with it)
- expenses such as advertising or other external costs related to the unit’s rental and administration
Reduce taxes: the environmental protection principle
Certain measures which serve to protect the environment and encourage the efficient use of energy are promoted in special ways in the tax code. If this concerns an older existing building, such expenditures can be 100 per cent deducted – in other words, this type of home improvements (installing a heat pump, the latest triple-glazed windows, etc.) are simply given the same status as normal maintenance expenditures.
In order to promote even more energy efficiency, a further improvement is currently being discussed. Previously it has not been possible to apply such investments over multiple tax periods. Currently, if someone pays out 200,000 Swiss francs in a single year, that person can apply this amount only to that single tax year – even if he would have more tax advantages if he were able to spread the expenses out over several years. There has not yet been any official decision, but it could happen that there will be a change at the federal level. According to HEV’s Stathakis, negotiations are taking place along these lines.