When it comes to taxes, property owners have more room to maneuver. In contrast to tenants and those who keep their savings in the bank or in the form of cash, they have several advantageous options. At the same time, there are also pitfalls that real estate owners should be prepared for. This starts with the acquisition of the property, and then continues through to the holding period and transfer.
Owners of real estate and those who intend to be, can acquire their property in different ways. Some do so through inheritance, gifts, purchase or construction, and others through corporate restructuring. This would not matter were it not for the different potential advantages concerning taxes and duties. The monetary amounts varies depending on the type of acquisition, and this needs to be taken into account in tax planning.
This is illustrated by the example of the property transfer tax, which is often overlooked. If ignored, property buyers can face unpleasant consequences that may cost them dearly. In return, organizing the transfer properly can result in considerable savings. This is demonstrated by the example of the canton of Zurich.
The canton abolished its property transfer tax on January 1, 2005, and since then has “only” charged a VAT-exempt land registry fee and a certification fee that is subject to VAT. These fees each amount to generally 0.1%, thus 0.2% in total, or at least CHF 200 calculated based on the property’s market value. They are collected by the municipal notaries and land registry offices. Different fees apply in certain special cases – and that’s where it gets interesting. If the transfer takes place, for example, as part of a “tax-exempt restructuring,” only a heavily reduced fee is charged, corresponding to the official’s workload (CHF 120 per hour ) and sometimes with a cap for the property in question. With a property valued at CHF 10,000,000 as an example, this results in a special fee of about CHF 1,000. Compared with the normal fee of 0.2% that would otherwise be due, equaling CHF 20,000, the possible savings are CHF 19,000.
Additionally, there are also reduced fees for succession, transfers between spouses and changes to collective ownership. The effect on the generally “better known” types of taxes are usually even more significant. For instance, this applies to inheritance and gift taxes on (unintentional) transfers below the market value, which require special clarification and documentation, in particular among related parties. It is also important to keep an eye on one’s qualification as a real estate agent, in both a positive and a negative sense. It is important not to forget VAT obligations, direct or indirect amortization options for the second mortgage, and the distinction between pledging as collateral and early withdrawal of pension funds, etc.
Deductions and expenses during the holding period
Experience has shown that ownership is a relatively simple tax issue compared with the purchase and transfer of property. In this case it is advisable to identify the much-discussed deductions for maintenance, expenses for energy-saving and environmental protection measures and any costs for conservation work, and to claim them accordingly. It is important to stagger the expenses correctly in conjunction with the flat-rate deductions granted by the canton. Current developments such as a loss carryforward and the assertion of reconstruction costs must also be included.
It is advisable to pay particular attention to avoiding double taxation for intercantonal and international tax exemptions; for example, with real estate in several cantons. Such double taxation is not easy to recognize in practice, so it often goes unnoticed. Different tax rates are applied due to the different assessment rules in each canton or country. The cumulative quotas of the individual tax domiciles, calculated and distributed according to recognized standards, may not exceed 100%. However, the different assessments can easily lead to quota over-runs that are missed and which in practice quickly result in relevant amounts of double taxation. Experience has shown that the majority of taxpayers are subject to this kind of “undetected” double taxation, which in most cases has continued over several years. In the case of higher cash flows, a detailed review is thus worthwhile. Future expenditure can then be corrected and past costs revised if necessary.
Sit out property bubbles and plan the transfer
When it comes to the transfer of real estate, the purpose and the holding period should ideally be included in advance in the structural considerations. This is where things come full circle – before a new cycle opens up. For example, commercial and investment properties should be embedded in asset structures in completely different ways. Several instruments are available to do so, such as heir-controlled holding, building lease, usufruct, evaluation by third parties or timely transfer to a corporation.
The concept of building lease in particular could come handy once again in times of economic uncertainty. Let us imagine a situation where the land owner does not wish to sell or develop an undeveloped or developed property themselves. Nevertheless, it is their intention to achieve a return or a one-off “profit”. The building rights holder, on the other hand, wants to spend as little money as possible on the building. In this case, a building lease can help both parties. It enables someone to be the owner of a property for a limited time on someone else’s land (whereby the purchase price is reduced by the land’s value). The land owner receives an annual rent and/or a one-time down-payment for the agreed term of the building lease (at least 30 to a maximum of 100 years). At the end of the specified term, possession of the building returns to the land owner in exchange for compensation agreed in advance. This model enables the land owner to achieve an annual return or a one-off payment analogous to a sale without having to sell the property definitively and thus avoiding a loss in times of falling property prices. This is also a way to sit out and even benefit from a property bubble.