Swiss imputed rental value tax: The main hurdle to homeownership

In any country, there are many hurdles that families have to overcome before they can get the keys to their newly bought home. Whether they can get a mortgage, afford the property taxes, and whether it is worth continuing to rent a house or apartment instead are all things that need to be considered. Switzerland has its own major hurdle for homebuyers to add to the list, called imputed rental value tax.

In Switzerland, according to Watson, only 36 percent of the population own their own homes, far lower than the UK (63 percent), France (57,6 percent) and Germany (50,4 percent). While some Swiss cities may be the most expensive places to live in the world, such a low rate of home-ownership cannot be attributed to the physical cost alone.

What is the Swiss imputed rental value tax?

In Switzerland, arguably the biggest barrier to buying a house, beyond its cost, is the imputed rental value tax. This tax is unique to Switzerland and poses a real challenge to those who want to buy their own property, as it can add thousands of Swiss francs on to your income tax bill.

The Swiss imputed rental value tax is a form of housing taxation, charged by the federal government on your annual tax return.

Who pays imputed rental value tax?

The tax is chargeable to those that own property in the country, whether they live there or not. Each canton has its own method to calculate the cost of your house, but the basic calculation for the tax is the same nationwide.

How is the tax calculated?

To charge this tax, the government calculates what the rental income of your property would be, if you were to rent the place out. How this is done varies, but typically uses the land value and the overall value of the property 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 example, if your annual salary totalled 70.000 Swiss francs and you owned property which has an imputed rental value of 42.000 Swiss francs a year, if you have no mortgage or maintenance costs, 112.000 Swiss francs would be your "income" for the year and taxed at that rate as federal income tax. This means that tax bills can be increased by thousands of Swiss francs a year, on top of the cost of the house.

How do I reduce the imputed rental tax in Switzerland?

In order to reduce the imputed rental value tax, homeowners are allowed to deduct payments made to Swiss mortgages, maintenance costs and the costs of conservation from their overall tax bill. “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 Switzerland have imputed rental tax?

At first, the idea may sound absurd, charging tax on the rent you don’t collect, and in truth it can be difficult to explain. The thinking behind the tax has its origins in the Second World War with it being used to pay for home defence. Now, the government says the tax is to balance the tax burden between those that own and those that rent in what is called a “solidarity-based tax.”

Why hasn't the tax been abolished?

Many attempts have been made to amend imputed rental value, including several votes in the Swiss parliament. Although it is likely to be replaced by another form of property tax, homeowners argue that the way it is calculated is unfair as the tax is based on rent they are not collecting. 

However, support for a full abolition is unlikely in the future. As interest rates rise, property owners may find themselves worse off if the imputed rental value is eliminated, as high mortgage payments may be able to eliminate the tax altogether.