Real estate tax return: Some tips you should know
Is completing your real estate tax return a chore? If you own apartments or properties, you need to plan your finances and taxes carefully. “Organization is half the work”, as they say. So if you want to sort out your tax return efficiently, you should always collect and keep all of your records. Our tips will help you to give you an overview.
Jürg Zulliger
Once a year, you will need to pick up the Real Estate Tax Return file: What can I deduct in terms of additional costs? Are there tax-saving options I’m not aware of? Cornel Tanno, director of legal services for the Zürich Homeowners’ Association (HEV), remarks: “Homeowners can substantially reduce their workload if they keep all of their records over the whole year and put them in chronological order.” “Organizing your records” doesn’t just mean haphazardly throwing every receipt and invoice into a box!
Taxation of real estate is generally carried out by the cantons. The fundamentals of taxation are, however, very similar: Firstly, it is important to decide whether you want to claim the flat-rate maintenance charge, or the actual documented costs for the tax year. Depending on the canton and the holding period for the real estate, the flat-rate usually amounts to 10 to 20% of the imputed rental value. In many cases, this decision is made quickly when completing the real estate tax return. For years with minimal maintenance expenses or minimal renovation, the homeowner should choose the flat-rate deduction. The homeowner would then claim that 20%, for example, and deduct the mortgage or debt interest on top of that.
Real estate tax return: Deductions
If more expenses were incurred over the last tax year in comparison to previous years, you should compile the additional costs. “If need be, the tax authorities will request relevant documents, or just the documents relating to the accounts,” explains Tanno, a lawyer from HEV Zürich. In essence, it is mainly the following expenses that are fully deductible:
- Building maintenance that preserves the property’s value. So, for example, paintwork, sanitary work, plumbing, carpentry or gardening. Ongoing additional expenses, such as insurance premiums (related to the real estate) or the running costs of appliances such as heaters, tumbler driers and washing machines can also be deducted.
- The cost of environmentally friendly and energy-saving devices is also deductible. Most cantons are generous in these cases: If a homeowner replaces an old oil heater with a modern heat pump with geothermal probes, for example, they can usually fully deduct this expense - whether or not the investment ends up being more expensive than simply replacing it with an equivalent substitute. You can also deduct the cost of high quality energy-saving windows. Most instructions issued by the cantons also mention preservation costs - especially, of course, if they are a mandatory requirement of the local authorities.
Real estate tax return: Added value
Expenses that substantially increase the value of the property, however, cannot be deducted - for example, the installation of a luxury sauna or a spa, when there was previously nothing of the sort in the house. Sometimes it’s very easy to make this distinction for the real estate tax return: The cost of repainting a room is, of course, considered to be simple maintenance, and is thereby deductible when completing the real estate tax return. Conversely, building a winter garden for a detached house is considered to be adding value to the property. “In many cases, however, it is a combination of value retention and value increase,” points out expert Cornel Tanno. For such cases, some tax authorities use standardized procedures. As a taxpayer, you should check whether the actual percentage of maintenance costs is not higher.
Even though it's not a fun pastime: Before you complete your tax return, it is worth looking back at the appropriate documents, instructions and leaflets from the relevant cantonal tax authorities. Planning is half the work: It is often sensible to spread out the work over several periods - so that the progression of income taxes can be broken up over several years. You should also sort out your taxes before making any major investments. A useful tip: A complete refurbishment of an old house is often more expensive than a new building. But in this case, you should not calculate the invoice without the tax authorities: Because, even if the renovations are largely tax-deductible, the tax authorities might classify a replacement construction completely differently. If your project is considered to be a new construction, there is not much you can deduct as allowable expenses.
Real estate tax return: Do you need help?
Except in particularly complex cases, most taxpayers are able to to complete their real estate tax return independently. According to expert Tanno, however, it can certainly be worth bringing in a good tax consultant for specific types of real estate ownership. This applies, for instance, if an individual owns several properties. A tax consultant knows when a supra-cantonal or even an international tax allocation need to be carried out.
If you occupy a property yourself, you must still accept that in Switzerland, this usage - just the imputed rent - must be declared and taxed as income. Katja Stieghorst, a lawyer at the Swiss Homeowners’ Association (HEV), comments: “There are a few exceptions, but the imputed rental value tends to increase.” Many tax authorities - some in the Canton of Zürich - use standard formulas. These values are then usually a little less than the actual market value (e.g. 60 to 70%). When in doubt, however, it is worth getting the stipulated imputed rental value independently verified.
If the imputed rental value increases, deductions are all the more important to remember. That is to say, keep them in mind for both the current tax year and long-term. If someday you sell your house or apartment, you will be taxed for the property gains, depending on period of ownership and market price. Property gains taxes in simple terms: If you bought an apartment 15 years ago and now get a revenue increase of 300,000 Swiss Francs, you will only be taxed for this gain. The rate of taxation depends on the holding period and the amount of profit made.
It is important for the tax assessment to consider what you originally paid, and which value-enhancing costs you have accumulated over the year. Anything you have undertaken and paid for, that increases the value of the property, can be deducted when calculating capital gains tax. Cornel Tanno states: “It is therefore essential for homeowners to collect and keep all records and receipts for 20 years!”
Tax return: Taxation of real estate sales
Homeowners should also be aware that capital gains tax can be postponed - as long as they acquire ownership of another self-occupied property within a reasonable period. The exact calculation and procedure is complicated on a case-by-case basis. For example, if a married couple over the age of 60 move out of a large detached house and into a small flat, they would still need to pay capital gains tax. To avoid unnecessarily high taxes, it is of course beneficial to utilize the deduction or postponement options. “If you are planning to make a replacement purchase, the notary should already have been informed at the point of selling. It is definitely advantageous if this is already stipulated in the sale agreement,” explains expert Cornel Tanno.
Tax return: Six tax tips for you to use
1. Are you sure you haven't forgotten any additional costs or building maintenance expenses?
2. Also bear in mind other expenses, especially for insurance (building insurance) and of course mortgage interest.
3. Condominium owners can deduct, in addition to maintenance expenses for their condominium, contributions towards renewal, repair, and respective management funds for the condominium owners' association.
4. Arrange a method of indirect amortization with your bank: 2. The mortgage is not reduced directly. Instead, your payments go to a pillar 3a-account in the bank, and are pledged.
5. Check for other opportunities for optimization - perhaps through life insurance or pension scheme buy-ins (these payments can usually be deducted from taxable income).
6. Pay your tax invoice as early as possible. Most tax offices have better interest rates for credit than banks.