Tax relief for debts on properties: rules & exceptions
Published on 31.10.2023 CET
Do you own a property in another canton and have debts on it? If so, you could benefit from these two expert tips. In this article, you’ll find out which tax rules apply to properties outside your canton of residence and how you might be able to save taxes.
If you own a property in a different canton, you will generally have to pay taxes on it there. This means you’ll also have to submit a tax return in that canton. Usually, you can just provide a copy of the tax return for your main place of residence. If the property is your only asset in that canton, your tax liability will be limited solely to that property.
What taxes will I have to pay in the canton where the property is located?
You’ll have to pay wealth tax, plus tax on any rental income generated from the property.
- Wealth tax is based on the taxable value of the property and your worldwide net assets. The higher the value of your assets, the higher the tax bracket you’ll be in.
- You will also have to pay income tax on the income generated from your property in the canton where it is located. Again, your worldwide net income is used to calculate the rate. Some cantons may also impose a property tax, which is typically calculated as a per mille of the property’s taxable value.
In the case of rental properties, however, the actual rental income is taxed. If you’re renting the property to close relatives or friends on preferential terms, for example, the rent should not be less than half the property’s rental value. You should also check whether granting a preferential rent might trigger gift taxes. If you own a property that you live in yourself, the following rules apply.
Tax tip for properties outside the canton of residence
Tip: Allocation of debt and debt interest payments
In Switzerland, debt and interest payments are also tax-deductible under certain conditions. The deduction is proportionate to the distribution of the assets, regardless of where the debt arise. It doesn’t matter whether the debt relates to a mortgage, a secured loan, credit cards, outstanding taxes or any other form of credit. The principle of claiming tax relief on debt and interest payments also applies to properties abroad and to individuals who live abroad but own property in Switzerland, although other factors must also be taken into account in these instances.
You can also claim tax relief for certain property-related expenses, namely maintenance costs for things that preserve the value of a property, such as upgrading heating systems or descaling boilers. These costs reduce the taxable income generated from the property in the canton where it is located. Property owners can take advantage of a variable flat rate: Each year, you have the choice of deducting either a fixed amount (10 to 20 percent of the rental income) or the actual costs incurred. Please note that the flat rate is only allowed for privately owned apartments or houses that are not primarily used for business purposes.
Worth noting: Value-enhancing investments, such as e.g. building a swimming pool, cannot be deducted as maintenance costs. Instead, these are classed as investment costs and can only be written off when the property is sold. It is therefore important to store these invoices in a safe place, so you can deduct the costs when the time comes.
Example calculation
- You live in the canton of Zurich and have worldwide gross assets worth CHF 3 million. This includes a property in the canton of Grisons, which is valued at CHF 1 million for tax purposes.
- In this scenario, a third of your assets are in the canton where the property is located, and two thirds in your canton of residence. This means you can only deduct one third of your total debts and interest payments in the canton where the property is located.
- Suppose your only debt is a CHF 600,000 mortgage for the property in Grisons, with an interest rate of 2 percent, which amounts to CHF 12’000 debt interests per year
- In this case, you could deduct a debt of CHF 200,000 and debt interest of CHF 4,000 in the canton of Grisons—essentially a third of your total debt and interest payments. The rest is deductible in your main canton of residence.
Taxation of properties in Switzerland is a complex topic, especially if the real estate is spread across different cantons. Careful planning in advance can therefore pay off. Our experts are on hand to answer any questions you have about Swiss taxes and will help you optimize your own tax situation.
Tax advice in context
It’s easy to fall into a tax trap if you’re not familiar with the ins and outs of this complex system. As a taxpayer, you can choose to deal with the authorities yourself, but you might miss out on potential tax breaks that you weren’t aware of. Our tax experts have a wealth of experience in all areas of Swiss tax law and will negotiate with the authorities on your behalf to obtain binding tax rulings when necessary.
Contact us for a no-obligation consultation and analyze your own tax situation with our experts.
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