Deductions in the event of an early mortgage cancellation

The complainant prematurely terminated the mortgages on the business premises by paying a prepayment penalty prior to its sale. The ruling states that prepayment penalties are deductible as investment costs and must be credited against the real estate profit tax if the dissolution of the mortgage is inextricably linked to the sale of the property. This means that the mortgage must be finally and completely dissolved immediately prior to the sale of the property and must not be replaced by a new mortgage.

In a second leading case(Neuchâtel case), the complainant did not want to claim the early repayment penalty as a deduction from the real estate gain but as private debt interest in the ordinary tax assessment. The Federal Supreme Court stated that in the event of a definitive early termination of the mortgage upon the sale of the property, the early repayment fee cannot be deducted as debt interest for income tax purposes. In the case of the sale of a property encumbered with a mortgage, there is no connection between the early repayment penalty and the debt in the sense of debt interest pursuant to Art. 33 para. 1 lit. a DBG. The connection fails because the early repayment penalty is considered to have a certain punitive character, which is not the case with normal private debt interest. A deduction of this compensation for income tax purposes is only justified if the cancelled mortgage is replaced by a more lucrative mortgage with the same creditor. In this case, there is a link between the old and the new mortgage contract which allows the borrower to deduct the compensation from the first contract as private debt interest.

According to previous jurisprudence, a double deduction of the prepayment penalty for both real estate profit tax and property income tax is excluded in any case.

Deductions in the event of early mortage cancellation also commented in the NZZ article