The abolition of the imputed rental value

On 2 February 2017, the political process in the current discussion on the abolition of the imputed rental value was initiated: The Committee for Economic Affairs and Taxation of the Council of States (WAK-S) submitted a parliamentary initiative to the Council of States for a corresponding proposal. On 14 February 2019, the same commission passed a preliminary draft without opposition with the aim of sending it for consultation in March 2019.

Content of the parliamentary initiative

According to the wording of the initiative, the Committee is striving for a general system change regarding the taxation of property owners. However, the system change would only affect owner-occupied residential property at the primary residence. Secondary residences are not covered by the initiative text. The aim of the proposal is to make the change as budget-neutral as possible, so that divergences and inequalities between house owners and tenants can be ruled out and home ownership can be promoted. On 14 August 2017, the Committee for Economic Affairs and Taxes of the National Council (EATC-N) gave its approval to the proposal of the Council of States' EATC and, at the same time, denied its support for the Leutenegger Oberholzer initiative, in which the deductibility of any debt interest would lapse if the imputed rental value were abolished.

In the course of 2018, the EATC-S announced in various media releases that it would start work on the draft. The cornerstones of the intended bill were presented and explained in more detail.

As mentioned above, the restriction of the abolition of imputed rental value taxation to owner-occupied residential property at the principal residence is an important cornerstone of the proposal. All second homes are exempted. The reason for this is that financially weak mountain regions have a large proportion of second homes and the abolition of the imputed rental value does not place an additional financial burden should be. Extending the abolition of the imputed rental value to secondary residences would mean a loss of a significant tax base for these municipalities.

In August 2018, the WAK-S finally informed about the details of the system change. In addition to the elimination of the imputed rental value on the income side, the deductibility of property maintenance costs will be cancelled. The aim, however, is to flexibly design deductions for monument preservation work or environmental and energy-saving deductions. In the case of such deductions, the cantons should be able to make use of their autonomy and declare themselves in favour of or against such deductibility. The following change in the bill seems to be uncontroversial: private debt interest on owner-occupied residential property should no longer be deductible, also in light of the reduction of private debt. Finally, the following point in the bill is entirely in line with the constitutional objective of promoting home ownership: an incentive is to be created for first-time buyers to purchase owner-occupied residential property. In the Commission's view, a time-limited deduction of mortgage interest is the most effective way to achieve this.

To illustrate this, we would like to take a closer look at the abolition of the imputed rental value, as it is currently being discussed, using a concrete example:

Example with debt interest at current interest rates

X is the owner of a condominium in Canton Y with a taxable value of CHF 800'000, calculated on the basis of an imputed rental value of 5% of the taxable value. For the purchase of the apartment, X was forced to take out a mortgage bond. The mortgage debt amounts to CHF 400'000 and the interest on the debt amounts to 1.5%. The property's maintenance contribution is 15 % of the imputed rental value.

Previous legal situation with imputed rental value:

Tax value: CHF 800'000

Imputed rental value (5 % of the taxable value): CHF 40'000

Mortgage debt: CHF 400'000

Interest on debt (1.5 %): CHF 6'000

Property maintenance (lump sum 15 %): CHF 6'000

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Total: CHF 28'000 additional income to other taxable income

Calculation method: Imputed rental value as taxable income less debt interest and lump sum property maintenance.

New legal situation without imputed rental value:

Tax value: CHF 800'000

Mortgage debt: CHF 400'000

Interest on debt (1.5 %): CHF 6'000

Property maintenance (lump sum 15 %): CHF 6'000

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The deduction of debt interest and real estate costs (a total of CHF 12'000) is not applicable here. This is more than compensated by the loss of the imputed rental value (CHF 40'000).

Comparison between previous and new legal situation with low interest level:

Previous legal situation: CHF 28'000 (additional net income to other taxable income)

New legal situation: no additional net income to other taxable income

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Difference in favour of the new legal situation: CHF 28'000 Reduction of taxable income due to the loss of imputed rental value

The following can be inferred from this breakdown: X was assigned a notional amount of the imputed rental value to his other income under old law. Taking into account the deduction of debt interest and property maintenance, an additional taxable amount of CHF 28'000 resulted for X. Applying the new legal situation, the addition of this imputed rental value would no longer apply. In return, debt interest and property maintenance are no longer deductible. If the initiative is accepted, homeowner X would therefore have to pay less income tax. On the other hand, the abolition of the right to deduct debt interest and property maintenance costs means the adjustment to the situation on the tenant side, who can't deduct the housing costs for tax purposes.

Example with an interest level of 8.5

X is the owner of a condominium in Canton Y with a taxable value of CHF 800'000. The calculation is based on an imputed rental value of 5 % of the taxable value. For the purchase of the apartment, X was forced to take up a mortgage bond. The mortgage debt amounts to CHF 400'000 and the interest on the debt is 8.5 %. The annual lump sum maintenance contribution of the property is 15 % of the imputed rental value.

Previous legal situation with imputed rental value:

Tax value: CHF 800'000

Imputed rental value (5 % of the taxable value): CHF 40'000

Mortgage debt: CHF 400'000

Debt interest (8.5 %): CHF 34'000

Property maintenance (lump sum 15 %): CHF 6'000

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Total: Fr. 0 additional income to other taxable income

Calculation method: Imputed rental value as taxable income less debt interest and lump sum property maintenance.

New legal situation without imputed rental value:

Tax value: CHF 800'000

Mortgage debt: CHF 400'000

Debt interest (8.5 %): CHF 34'000

Property maintenance (lump sum 15 %): CHF 6'000

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The deduction of debt interest and property costs is omitted here (total CHF 40'000).

Comparison between the previous and new legal situation with high interest rates:

Previous legal situation: no net income in addition to other taxable income

New legal situation: no additional net income to other taxable income

These examples illustrate that the abolition of the imputed rental value with simultaneous dissolution of the debt interest deduction is a logical step. If a property owner is no longer burdened with the imputed rental value, he should not be able to claim additional deductions. Furthermore, it is also obvious why the Home-owners Association (HEV) has committed itself to supporting the initiative right now. The interest level in Switzerland has been resting at a historic low for quite some time. Homeowners profit from attractive condi-tions to procure outside capital for a home of their own. The imputed rental value thus leads to a noticeable additional tax burden, which would be eliminated in the future. At the same time, homeowners do not lose out on a large debt interest deduction because the interest level is low. If interest rates were to rise, as in the second example, the imputed rental value would no longer have to be added to income, but the higher debt interest rates would mean that taxable income would not fall despite higher interest rates. A parallel increase in property maintenance costs to the higher debt interest rates could further aggravate this Problem.

The consultation process carried out in March 2019 naturally also called on opponents of the proposal to comment on the draft. In mid-June 2019, the Conference of Cantonal Finance Directors (FDK) issued a media release stating that the proposed reform of the Council of States Commission was unconstitutional. criticism was voiced in particular, the lack of compliance with taxation principles, taking as an example the relationship between tenants and owners and owners with different financial and asset strength. Also a burden on cantonal budgets would be the consequence of such a change in the law. At the same time, the Finance Directors advocate more consistent enforcement, in the event of the actual elimination of the imputed rental value. The following are the key points in particular: Deductions for energy saving, environmental protection and preservation of historical monuments would have to be made not only at federal level, but also at the cantonal level, the introduction of the first-time buyer deduction should not be introduced and the deductibility of debt interest should be more restricted. The representatives of the cantons warned that the current law on the taxation of residential property was significantly better than the requested proposal.

Conclusion

There is no doubt that the imputed rental value is a foreign body in the tax system that could (almost) not be eliminated for political reasons. With the EATC-S proposal, the end of the imputed rental value seems to be within reach, and it is possible that this political «shelf warmer» can finally be «disposed of». However, the examples above show that the solution «benefits» from the current framework conditions and that the current interest rate situation supports the project. The topic should therefore not remain on the political stage for too long, otherwise the resistance against the dissolution could suddenly increases (again). We will keep you up to date on the developments.