The abolition of the imputed rental value on the verge of a breakthrough


The abolition of the imputed rental value - an old topic is suddenly on everyone's mind again. For years, this idea has occupied the tax policy discussion without having achieved any real progress. The chance that this relic from the Second World War will be abolished is within reach. In the following we show you the development and implications of this system change.


On 2 February 2017, the political process in the current debate on the abolition of imputed rental value was initiated: The Committee for Economic Affairs and Taxes of the Council of States (EATC-S) submitted a parliamentary initiative for a corresponding proposal to the Council of States. On 14 February 2019, the same commission, without opposition, agreed on a preliminary draft with the aim of sending it for approval 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 the year 2018, the EATC-S announced the commencement of the draft’s design in various media releases and the cornerstones of the intended bill were presented and explained in more detail.

As mentioned above, the limitation of the abolition of imputed rental value taxation to owner-occupied resi-dential property in the primary residence forms an important cornerstone of the bill. All secondary residen-ces are excluded. The reason for this is that financially weak mountain regions have a large proportion of secondary residences and shall not be burdened with an additional financial burden if the imputed rental value is abolished. To extend the abolition of the imputed rental value to secondary residences would mean a significant loss of tax substrate for these municipalities.

In August 2018, the EATC-S finally informed about the details of the system change. In addition to the abolition of the imputed rental value on the income side, the deductibility of property maintenance costs will be eliminated. However, the aim is to allow flexible deductions for monument conservation work or environ-mental and energy-saving deductions. In the case of such deductions, the cantons should be able to make

use of their autonomy and express themselves in favour of or against such deductibility. The following change appears to be undisputed in the bill: Private debt interest on owner-occupied residential property should no longer be deductible, this also in light of the reduction of private debt. Finally, in line with the constitutional objective of promoting home ownership, the following point is presented in the bill: First-time purchasers should be given an incentive to purchase owner-occupied residential property. In the Committee's view, the most expedient instrument to achieve this objective is a temporary debt interest deduction for mortgage interest.

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

Example with debt interest at today's interest rate level

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 1.5 %. 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 (1.5 %): CHF 6‘000

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

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

Debt interest (1.5 %): CHF 6‘000

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

__________________________________________________________ 

The deduction of debt interest and property maintenance costs (a total of CHF 12’000) is omitted here. This is more than compensated by the elimination 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 in addition to other taxable income

_________________________________________________________

Difference in favour of the new legal situation: CHF 28‘000 reduction in taxable income due to elimi-nation 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 mainten-ance 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 rate 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 tax value): CHF 40‘000

Mortgage debt: CHF 400‘000

Debt interest (8.5 %): CHF 34‘000

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

Total: CHF 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 _______________________________________________________ 

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

Comparison between previous and new legal situation with high interest rate level:

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

New legal situation: no additional net income in addition 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 incre-ase 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 bill to comment on the proposal. 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. The main criticism was the lack of compliance with the taxation principles, taking the relationship between tenants and owners as an example, as well as owners with different levels of solvency. Another consequence of such a change in the legislation would be a burden on cantonal budgets. At the same time, the finance directors are in favour of more consistent enforcement in the event of the actual abolition of the imputed rental value. The key points here are above all the following: Deductions for energy saving, environmental protection and monument preservation should to be abolished not only at the federal level but also at the cantonal level; the introduction of the first-time purchaser deduction should not be introduced and

the deductibility of debt interest should more severely restricted. The representatives of the cantons warned that the current legislation regarding the taxation of residential property is significantly better than the requested bill.

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.