Lump-sum deduction for real estate

The complainants A.A. and B.A. were owners of several properties during the 2008 tax period.

The following objects were allocated to business assets by the tax authorities:

  • Two apartments that were merged by the tenant (Object 2). The property is fully self-financed and without mortgage charges. The apartment has been let to a third party since 2005 and a ten-year lease has been in place since 2007.
  • An apartment was rented to the complainant's sister (Object 3). This was financed from private resources.

The complainants objected to this assessment. They argued that properties 2 and 3 were not business assets but private assets, so that the (higher) lump-sum maintenance costs were deductible instead of the actual maintenance costs. Therefore, their taxable income for cantonal taxes and direct federal tax was to be reduced. However, this objection was rejected by the tax commission or the administration of the Canton of Schwyz. Subsequently, the complainants appealed the objection decision to the Administrative Court of the Canton of Schwyz, which dismissed the appeal. The complainants then appealed to the Federal Supreme Court. In its decision of 13 April 2017(2C_784, 785/2016), the Federal Supreme Court upheld the appeal on the following grounds.

Differentiation between privately held properties and properties held as business assets

According to Art. 32 para 4 DBG, the taxpayer may claim a lump-sum deduction for real estate held as private property instead of the actual costs and premiums. This flat-rate deduction is specified in the Federal Council's Ordinance on Real Estate Costs of 24 August 1992. According to Art. 3 of this ordinance, the taxpayer may choose between the deduction of actual costs and the lump-sum deduction in each tax period and for each property and, according to Art. 4, a flat-rate deduction cannot be made for properties that are primarily used for business purposes by third parties. In addition, according to Art. 18 para 2 sentence 3 of the DBG, all assets that entirely or predominantly serve a self-employed activity are regarded as business assets. According to federal court practice, real estate trading is defined as a self-employed activity "if the taxable person systematically purchases and sells real estate with the intention of making a profit". The activity as a whole must therefore be directed towards acquisition. According to the Federal Supreme Court, possible indications are the systematic way of proceeding, the frequency of real estate transactions, the close connection between a transaction and the professional activity of the taxpayer, the use of special expertise, the short duration of ownership, the use of considerable external funds for financing, the reinvestment of the profits achieved in similar assets or the realisation of profits within the framework of a partnership. Conversely, assets are to be regarded as private assets if by renting out their own properties they only manage their own assets. This is also the case if the assets are extensive, professionally managed and commercial books are kept.

In casu, the complainant was a partner in two construction consortia and in this respect also exercised an independent (secondary) gainful activity. However, this does not automatically mean that all of his properties fall under the business assets, but this classification must first be examined individually for each property. In casu, the complainant, as an architect (main occupation), had the necessary expertise and he also learned of the purchase opportunity and the detailed properties of properties 2 and 3 through his employer at the time, C. AG, which would speak in favour of an allocation to business assets. However, the properties were financed entirely with own funds and the funds used did not come from the sale of other properties. In addition, the holding and long-term letting (combining two flats and a ten-year lease) does not speak for the intention of a quick and profitable resale, but rather for the fact that the complainants would like to achieve a long-term capital gain with it. The Federal Supreme Court thus decided, after an overall assessment of the circumstances, that the elements that speak in favour of allocating properties 2 and 3 to private assets predominate. The complainants can therefore take the lump-sum deduction for properties 2 and 3 in accordance with Art. 32 para. 4 DBG.

Final remark

The decision shows by way of example that there is no reliable jurisdiction for the fiscal analysis of a situation in the area of real estate trading (and also securities trading). Each individual case is weighted and evaluated according to all known criteria. The fiscal analysis in connection with real estate and securities trading remains a "game of chance".

Further casuistry

In its ruling (2C_966/2016) dated 25 July 2017, the Federal Supreme Court ruled that the reinvestment of a profit made from a commercial real estate trade in the conversion of another property was a strong indication that the complainants wanted to continue to be active in the real estate sector and thus as an indication of self-employed activity. Since the property in U. had been sold out of financial distress, the reinvestment in another costly project was to be classified as a real entrepreneurial risk that went beyond mere private asset management (E. 4.1.1.). And also the intention to make a profit was affirmed because, despite their financial plight, the complainants converted the disputed house in V. into a luxury property in order to resell it after only four years and thus generated a profit of approximately CHF 5 million (E. 4.1.4.).

Also in its rulings (2C_160/2017, 2C_161/2017, 2C_162/2017, 2C_163/2017) dated 24 August 2017, the question was disputed whether the property was to be allocated to private or business assets or whether, with regard to the costs and premiums a lump-sum deduction could be made (E. 3.1. et seq.). However, in the absence of a sufficient determination of the facts by the lower court pursuant to Art. 112 para. 1 lit. b FSCA, the Federal Supreme Court could not examine whether the property was rightly attributed to the private assets by the lower court (E. 3.2. et seq.). The appeals were upheld and referred back to the lower court to supplement the facts of the case and to provide legal justification.