After years of wrangling and non-starter proposals, Switzerland has taken the penultimate step in abolishing imputed rental value tax - seen by many as one of the biggest barriers to homeownership. Here’s what you need to know about the fee, how its abolishment would affect the country and where we go from here.

Switzerland takes final step to scrapping imputed rental value tax

On December 20, both the National Council and the Council of States voted to abolish the imputed rental value tax. The decision followed the events of December 18, when the upper house of parliament surprised commentators by voting in favour of a proposal submitted by the lower house after weeks of resistance.

What is imputed rental value tax?

Along with the outright cost of buying a house in Switzerland, one of the biggest financial barriers prospective buyers have to overcome is the imputed rental value tax. The housing tax is significant as it can add thousands of francs to your income tax bill in certain scenarios.

To charge the tax, the canton where your home is situated calculates what the rental income of your property would be if you were to offer your home for rent.  How this is done varies by region, but it typically uses the land value and the overall value of the property, which is calculated by factors like size, location, age, and the quality of utilities. This theoretical annual rental income is then added to the income from your salary and taxed as such. 

For instance, if your salary totalled 80.000 francs a year, you owned a home with an imputed rental value of 42.000 francs a year, and you had no mortgage or home maintenance costs, 122.000 francs would be your “income” for the year for tax purposes. This means that tax bills can be increased by thousands of Swiss francs a year, on top of the cost of the house.

How can you counter the effects of imputed rental value tax?

This extra bill can be reduced, however, as mortgage costs can be deducted from your imputed rental value tax. “Value maintaining expenses” can also be deducted from the tax, like repairs and renovations, although new kitchens or extensions are counted as “value-adding” and cannot be deducted.

Why does the tax still exist?

Though it was first imposed to pay for home defence during the Second World War, the government sees the fee as a “solidarity-based tax” - i.e. a way of balancing the financial burden between tenants and homeowners, as the latter don’t have to pay rent. Nevertheless, the tax is extremely unpopular among some lawmakers, who have spent upwards of 30 years trying to get the scheme consigned to history. 

However, lawmakers have often struggled to balance scrapping the tax with the fact that it would mean the end of many tax deductions for homeowners, and a reduction in tax revenue for Swiss cantons, especially those in the mountains who benefit greatly from the tax on second homes. Under the current plan, for example, the government estimates that federal, cantonal and local authorities will lose 1,67 billion francs in revenue. 

How would scrapping the tax impact Swiss housing costs?

Under the plans approved by parliament, the imputed rental value tax will be scrapped for first and second homes. Instead, the new law would give cantons the right to charge a special property tax on second homes.

Tax deductions related to building maintenance will be completely scrapped, though cantons are able to introduce deductions for homeowners who install energy-saving and environmental upgrades. The amount that can be deducted thanks to mortgages will be significantly reduced, but first-time buyers will be given a “limited” deduction. 

Who will (and won't) benefit from an end to imputed rental value?

According to mortgage provider and analyst firm Moneypark, those who have already paid off their mortgages will be the biggest winners when it comes to scrapping imputed rental value tax. It will be especially beneficial for pensioners who bought their homes cheaply and paid off their mortgages.

The biggest losers will be those with expensive mortgages and "wealthy property owners who own several residential units", as they will no longer be able to use mortgage deductions to lower their bills. However, for most homeowners with a mortgage, the change will mean a balance of lower taxes but also fewer deductions.

Scrapping imputed rental value tax: What happens next?

Though scrapping the imputed rental value tax has passed parliament, the proposal will be made a referendum as it requires an amendment to the Swiss constitution. The proposal will likely face a vote in 2025.

The proposal itself faces an uphill battle, with the Tages-Anzeiger noting that changes to the tax have been rejected at the ballot box four times since the 1990s. Alongside left-leaning parties, the change is expected to be opposed by most cantons, tenants, banks and construction firms, as it would lead to lower cantonal revenues and eliminate most tax advantages in holding housing debt.

Even those who supported the plan are hesitant, with FDP National Councillor Pascal Broulis calling the whole affair "Kafkaesque - so much work for a more than mediocre result… [It’s a] choice between the plague and cholera." "I have the impression that many of my colleagues are tired of the imputed rental value after seven years of work…They want to get the issue off the table and let the people decide," Centre Party State Councillor Stefan Engler added.

The FDP’s Martin Schmid said that parliament was taking “an extremely risky path”, as he does not think that the plan is popular enough among any party to pass. "We are simply passing the hot potato on to the people," he concluded.