Abolition of imputed rental income

Maintenance costs for self-occupied residential property

Previously, owners could claim various costs relating to their self-occupied property as tax deductions. These principally include maintenance costs, building insurance premiums, contributions to renewal funds for condominium properties, and costs for third-party administration.

With the abolition of imputed rental income, these deduction options for self-occupied properties will generally be eliminated. The legislator justifies this approach on the grounds that imputed rental income will no longer be subject to income taxation.

For rented properties, the position remains largely unchanged. Maintenance costs may continue to be claimed as tax deductions, since rental income continues to constitute taxable income.

For properties that are partly self-occupied and partly rented, the deductibility of costs must be assessed on an individual basis. Depending on the circumstances, such costs may be partially deductible. For example, a façade renovation can be partially claimed as a maintenance cost - typically on a pro rata basis, calculated according to the rented floor area relative to the total floor area.

Debt Interest Deduction in General

With the abolition of imputed rental income, the ability to deduct debt interest on self-occupied residential property will generally also be eliminated. This applies not only to mortgage interest, but to all forms of debt interest, including loans and personal credit facilities.

In practical terms, this means that individuals who exclusively occupy their own property and do not own rented properties will in future generally no longer be able to deduct private debt interest against their income.

Debt interest deduction for rented properties

The situation differs for property owners who rent out their properties. In these cases, a proportional debt interest deduction will continue to be permissible.

The extent of the permissible deduction is determined not by the original purpose of the debt, but by the proportion of rented properties relative to total private assets.

For owners of investment properties, debt interest will therefore continue to have tax relevance in future, at least in part. The calculation is performed in accordance with the following formula, based on wealth tax values (the so-called quota-restrictive method): % = rented properties in Switzerland / total assets
 

Example: Mr and Mrs Miller own a rental property valued at CHF 800,000 and hold bank deposits of CHF 1,200,000. Their total assets therefore amount to CHF 2,000,000.

The property is financed in part by debt of CHF 500,000. At an interest rate of 2%, annual debt interest amounts to CHF 10,000.

Since the assets include a rented property, a proportion of the debt interest will continue to be tax-deductible. To calculate this, the ratio of the rented property to total assets is determined. The rented property represents 40% of total assets (CHF 800,000 of CHF 2,000,000).

Accordingly, 40% of the debt interest may also be claimed as a tax deduction. Of the annual debt interest of CHF 10,000, CHF 4,000 is therefore deductible, whilst the remaining CHF 6,000 is no longer permissible as a deduction.

Special provisions for first-time buyers

Since the reform will largely eliminate the debt interest deduction for self-occupied residential property, the legislator has introduced a special provision for persons acquiring residential property for the first time. In principle, it is not relevant whether the property is purchased, inherited, or received as a gift.

First-time buyers of self-occupied residential property may continue to claim a portion of their mortgage interest as a tax deduction during a transition period of ten years. The maximum deduction in the first year is:

• CHF 10,000 for married couples
• CHF 5,000 for single persons

Subsequently, this amount is reduced in equal annual steps over the ten-year period - CHF 9,000 or CHF 4,500 (second year), CHF 8,000 or CHF 4,000 (third year), and so forth.

If the first self-occupied property is sold and replaced within a reasonable period by another self-occupied property, the deduction entitlement is not forfeited. Rather, the owner may transfer the remaining entitlement to the new self-occupied property. However, the original ten-year maximum period is not extended.

The deduction option expires after ten years, or if the property is sold or ceases to be self-occupied. From the following tax year, any remaining deduction may no longer be claimed.

Energy-saving and environmental protection measures

An important aspect of the reform concerns investments in the energy efficiency of properties.

Under current law, certain measures for energy-saving and environmental protection can be claimed as tax deductions. These include, for example, the replacement of an outdated heating system with a modern heat pump, the installation of a solar system, or energy improvements to the building envelope. In some cases, even investments that enhance the property's value may be deducted.

The situation differs at cantonal and municipal level. The cantons retain the option to provide tax deductions for energy and environmental protection measures.

Furthermore, energy-related renovations may continue to be spread over several tax years under certain conditions if the costs cannot be fully utilised in a single year. Should the respective canton continue to allow such deductions, this option remains available for cantonal and municipal taxes. Unused deductions may also be carried forward and claimed in the two following tax periods.

Whether and to what extent such deductions will continue to exist in future will vary from canton to canton. In certain cantons, the option to apply for subsidies for energy and environmental protection measures may be created in place of a deduction. A uniform solution across Switzerland is not to be expected.

Use within the family

Within families, owners frequently make their properties available to children or other family members free of charge or at a substantially reduced rent.

Under current practice, the tax authorities do not regard such provision as a commercial renting. Rather, the property continues to be treated as self-occupied. The owner must therefore declare at least the imputed rental income but may simultaneously deduct maintenance costs.

How the tax authorities will treat properties rented at a significantly reduced rent in future remains unclear. It is conceivable that the tax authorities will in future tax only the actual (low) rental income received, whilst simultaneously restricting the deductibility of maintenance costs. However, no definitive guidance has yet been issued on this matter.

Property tax on secondary residences

As of 2029, the cantons may no longer levy imputed rental income on self-occupied properties. During the political legislative process, this abolition was primarily criticised by tourist mountain cantons, which anticipate tax losses resulting from the elimination of imputed rental income - a charge that currently applies also to self-occupied secondary residences (holiday homes and houses).

To address these concerns, as of 2029, cantons may levy a cantonal property tax on "predominantly self-occupied secondary residences". This measure is intended to offset anticipated tax losses. Each canton will decide independently whether to introduce such a tax. Currently, at least the cantons of Grisons, Valais, and Ticino have announced that they will examine its introduction. Details regarding the tax base and the applicable tax rates are not yet available.

Wealth tax

The abolition of imputed rental income does not affect wealth tax. Self-occupied and rented properties continue to be subject to cantonal wealth tax. Mortgages and other debts remain deductible against the assessed property value.