Property tax: avoid these expensive mistakes

Author: Bernhard Bircher-Suits, FundCom AG

Being a taxpayer can sometimes feel like running on a hamster wheel: year after year you have to submit your tax return to the tax office. The declaration of income and assets must be ‘complete and truthful’. As a taxpayer, you also have to provide information on residential and holiday properties, both domestic and foreign, on your tax return.

If you extend the first filing deadline until autumn and fail to submit a tax return to the tax office, despite reminders, you will still get a demand from the tax authorities. Your tax office will simply estimate your taxable income and assets of its own accord ‘using dutiful judgement’. In the worst case, this leads to substantially higher taxes.

Taxes are payable at the location of the property

If you own a residential property, bear in mind that in principle, taxes on the purchase, ownership or sale of a house, land or apartment are payable at the location of the property. And if you have several properties in different locations, you will need to send the tax return of the main residence to the tax office of the secondary residence. But: unlike tenants, private homeowners have the option of legally reducing their tax burden through various deductions. 

Tax deductions: similar rules apply throughout the cantons

Homegate asked cantonal tax authorities in German-speaking Switzerland about common real estate-related errors and omissions that people make when they complete their tax returns. Philipp Moos, head of the natural persons department in the canton of Zug tax office, replied: ‘When declaring residential property, it’s likely that the odd expense or two will be missed out because the invoices paid during the year were not kept for the tax declaration. That means deductions that would reduce the tax burden might be forgotten.’

Rico Kluker, department head at the canton of Grisons tax office, points to other expensive mistakes: ‘Tax-deductible maintenance costs are not declared on the assumption that they are non-deductible, value-enhancing expenses.’

Reto Flury, spokesperson for the canton of Zurich finance department, writes: ‘Forgetting a large deduction in a declaration can be expensive if the taxpayer only notices when the relevant tax period is already legally binding.’ In that case, it’s too late to submit an amended return that would reduce your tax. 

Important distinction: value-preserving or value-enhancing maintenance?

The conclusion from these answers is that if you file away receipts for value-preserving repair invoices properly and declare them correctly in your tax return, you can reduce your tax burden. When you fill out the tax forms, if not before, you need to clarify which parts of the completed renovation work will be considered by the tax authorities as ‘value-preserving’ or ‘value-enhancing’.

As a rule of thumb: expenses for the maintenance of property are deductible if they cover work aimed at ‘preserving present value’ without changing the design or purpose of the property. Deductible maintenance costs usually have to be repeated regularly. Under the Direct Taxation Harmonisation Act, the following expenses in particular can be deducted from taxable income in the case of private property:

• the cost of building maintenance
• the cost of repairing newly acquired properties
• insurance premiums
• the cost of management by third parties

Some cantons may also provide for these deductions:

• environmental protection
• energy savings 
• historical preservation

For example, you can claim for the replacement of an old roof, swapping an oil heater for a heat pump or upkeep of the garden on your tax return. Value-preserving work includes things like plumbing, painting, carpentry and plaster work, as well as service subscriptions and premiums for building insurance. Operating costs, such as contributions to a repair or renewal fund and property administration costs, can also be deducted from taxable income – but that doesn’t include costs for administration you carry out yourself.

Examples of non-deductible expenses include the construction of a roof that adds value to the property, the installation of a new sauna or an extension to a conservatory. But energy-saving investments that enhance value – in other words, investments that increase energy efficiency and use renewable energies – are tax deductible. As a rule, the costs of historical preservation work are 100% deductible.

The ‘right’ time is not always clear

For taxpayers, the ‘right’ time for deductions is not always clear. In principle, you can only claim maintenance costs in the year they were incurred, although some cantons have different rules (date of invoicing, date of payment or a combination of the two). This means that maintenance can only be deducted in that year. If the cost of maintenance is higher than your taxable income, you can’t carry a ‘surplus’ over to the following tax year.

This, however, doesn’t apply to energy-saving measures. You can carry these costs over to the following two tax periods if, in the tax year concerned, your deduction was higher than your taxable income.

Important: You cannot divide energy-saving measures between the three tax periods. If your taxable income is negative after deduction of the energy-saving measures in the current year, you can carry over the negative income to the following year in the amount of the energy-saving measures.

Tax authorities review value-preserving deductions

When tax authorities check your return they will review the deductibility of value-preserving costs. If necessary, the tax administration can adjust the costs claimed, and the taxpayer has the right of appeal if they disagree.

Philipp Moos from the canton of Zug tax office writes: ‘The most frequent corrections the tax authorities make are in actual maintenance cost claims. The delineation between value-preserving and value-enhancing maintenance costs and investments for energy-saving measures often has to be corrected in the assessment procedure.’ This is also confirmed by a property tax expert. The delimitation of property maintenance costs, for example, ‘often leads to discussion’. 

Flat rate or actual maintenance costs?

This survey of tax authorities also shows that estimates of the proportion of value-preserving and value-enhancing costs are a common tool for the authorities in the case of major renovations and erosion. Some cantons use estimates ‘for procedural economics’. Philipp Moos from the Zug tax office also draws attention to expensive pitfalls for taxpayers: ‘Some homeowners “only” claim the deduction for flat-rate maintenance costs, although they might be able to claim higher actual maintenance costs.’

The background: each year, taxpayers can decide to either document and deduct actual costs, or deduct them on a flat-rate basis. Depending on the canton and the year the property was built, the lump sum usually amounts to 10 to 20 % of the estimated rental value. In many cases, this is an easy decision when it comes to the declaration of real estate; in years of high expenditure, when you’re carrying out extensive renovations and conversions for instance, it is worth listing and deducting the actual costs in detail.

In years when you have little maintenance or renovation, you can opt for the flat-rate deduction. If the tax office isn’t sure about a tax return, they will ask for an original invoice or an account ledger. Important documents must be submitted with the tax return itself.

Tax return: real-life tax tips

• Don’t forget to file receipts for renovation work with your tax return. Homeowners should collect and file tradesperson receipts throughout the year.

• Burden of proof: The taxpayer must prove that the work carried out was value-preserving (and therefore deductible) or value-enhancing (not deductible). So if you’re carrying out a major renovation, it’s a good idea to get photographic proof of the condition of the property before work begins.

• Estimated rental value: This has to be taxed as fictitious income on owner-occupied properties. The tax office provides information on the estimated rental value; you can appeal in the event of discrepancies.

• Subsidies: It is essential that you apply for subsidies and tax incentives in good time. Gather information on existing subsidy opportunities before you get under way. You can only deduct the refurbishment costs you pay yourself – in other words, you have to take out subsidies first. If the funds are only paid in the following year, you have to declare the subsidy as income.

• Costs for energy-saving investments can be carried forward over the next two tax periods.

• Fact sheets: Cantonal tax offices offer fact sheets for distinguishing between value-preserving and value-enhancing maintenance work. 

• Smart planning for renovations: If you’re planning a renovation, refurbishment or conversion, consider whether the value-preserving expenditure can be spread over two tax periods (e.g. as one year ends and another starts). This allows you to reduce tax progression and pay lower taxes overall. Sensible renovation packages can help you avoid cost surcharges; in other words, a tax-motivated ‘sticking plaster’ approach is usually more expensive than a comprehensive refurbishment.

• Owned condominiums: You can also claim deposits in refurbishment funds and indirect amortisation of your mortgage via pillar 3a for tax purposes.

• Important deductions: Don’t forget deductions for value-preserving maintenance, building insurance and mortgage interest rates.