8 November 2018

Taxation on the rental value: soon to be a thing of the past?

By Nicolas Terrier

By Nicolas Terrier

Rental value

Owners are obliged to pay taxes at municipal and cantonal level on the property they occupy. Specifically, the state will calculate a fictitious rental value which is then added to the owner’s taxable income. The approach to this calculation differs depending on the canton of residence.

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Background and origin of the rental value

In the context of the First World War, the Confederation’s customs duties collapsed. Switzerland, therefore, decided to introduce an exceptional war tax in 1915. What worked once was replicated in 1929 during the Great Depression. Without a constitutional basis, the Confederation began to levy a “crisis contribution” on income and its own rental value. This process should have lasted until 1938, but eventually remained entrenched, and continues to this day despite a different economic context.

Several initiatives have already been taken to abolish this levy on the rental value. First in 1999 with the “Home Ownership for All” initiative, then in 2012 with the initiative on homeownership savings. Both have failed because they benefit the owners to the detriment of the community. With this new project in the pipeline, the Council of States’ Economic Affairs Commission is thus resurrecting a sea snake.

It has just established the broad outlines of the reform, which will be refined at the beginning of 2019 before being submitted to the people. It is therefore interesting to briefly review the stakes and impacts of such suppression.

Rental value and the current taxation system

As mentioned, the purpose of this tax is to restore a balance between tenants who pay rent and landlords who do not. It is understood that the landlord can deduct from his total taxable income the maintenance costs inherent to his property as well as the mortgage interest charge, meaning that this can be advantageous. Owners have thus been content to maintain it for years because the rental value and deductible expenses were in balance, except that with the context of historically low rates, the deduction has become less attractive.

From a purely financial point of view, this system does not take into account the fact that the landlord has immobilized his capital in his home, which does not earn him anything. This is equivalent to the opportunity cost, as the owner could invest his capital and benefit from the profit of this investment.

Moreover, this system is particularly detrimental for people who retire after having saved during their working life to become homeowners and who end up with a “fictitious income” that can disrupt the retirement plan.

The current challenges posed by the Economic Commission of the Council of States

In the draft of the Economic Commission of the Council of States, the fictitious rental value would be abolished on principal residences. Secondary residences would therefore retain this taxation system. The deductions for maintenance costs and mortgage interest charges would also be eliminated.

It should be noted that a variant would nevertheless be provided for so that the deduction would still be possible for the acquisition of a first home. This is in order to support access to real estate, which was a sensitive point, decried on the previous project. This makes sense given that Switzerland has the lowest rate of real estate access in Europe, as can be seen in the article on the current transformation of access to real estate in Switzerland.

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What are the impacts of this novelty?

Without the rental value added to income, it would at first glance become more interesting to become the owner of one’s home from a tax point of view because taxes would be levied on a lower value.

According to the theory, this should indeed increase the demand for real estate and thus put upward pressure on property prices. Theory supported by the daily newspaper 24 Heures (Ivan Radja, 2018). However, the impact is more complex to anticipate.

First of all, the tax on the rental value relates only to owner-occupied housing, which is not the case for the majority of the population.

In addition, the fact that deductions are no longer possible could offset the increase in the attractiveness of real estate. As mentioned above, interest rates are historically low and the impact of the passive interest deduction has already become less effective, with the result that the large proportion of future homeowners have potentially already resigned themselves to owning their own home.

However, it seems relatively certain that abolishing the passive interest deduction would reduce the tax attractiveness of indebtedness, or at least increase the decision to amortize the debt.

Moreover, the reduction in the attractiveness of debt, if that is the consequence of abolishing it, would make the system more robust, since it would reduce the impact of a potential rise in rates. In a context where we have reached a record volume of mortgages valued at more than CHF 973 billion according to the SNB at the end of 2017 (SNB, 2018), which is 46% more than the Swiss GDP of CHF 668 billion, according to the same source.

A sudden impact is therefore to be put into perspective, in particular by the fact that many homeowners have seized the opportunity of historically low-interest rates to lock in for the long term, implying a smooth transition.

In terms of the elimination of energy deductions and maintenance costs for homeowners, this should certainly reduce the motivation of some homeowners to carry out renovations and improve the energy efficiency of their homes. This willingness can be maintained at the cantonal level. On the Geneva side, combined with the famous LDTR which hinders the renovation of the rental housing stock, this would not help to counterbalance the fact that the housing stock is increasingly ageing and energy inefficient. It should be noted that each canton should be able to retain the option of applying this abolition.

In any case, if no referendum is launched, the abolition of the rental value would take place on 1 January 2020 and the debate is launched. In view of the previous failures of this project, there is every reason to believe that this deadline will be extended. In the meantime, it is worth checking the rental value and appealing in the event of any errors.

To help you with the calculation, we invite you to visit the website of the Swiss administration:

References

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