Tax law What does elimination of the imputed rental value mean?

Who’s going to win, who to lose? Depending on the situation, the implications of elimination will vary.

by Matthias Holzhey 04 Feb 2019

On 20 August 2018, the Economic Commission of the Council of States (Ständerat) established the following benchmarks:

  • The imputed rental value will be canceled for the primary residence. Second residences are not affected by the system change – out of consideration for the mountain cantons, which fear large tax shortfalls.
  • In turn, the costs of maintaining and renovating a property will no longer be tax deductible.
  • At the federal level, energy saving and environmental deductions will no longer be permitted. The cantons may continue to allow for such deductions in their tax legislation.
  • The tax deduction of interest on debt for owner-occupied property will be abolished. Debt interest deductions of the order of 80 or 100 percent of other investment income (e.g. rental income from a second property, income from securities) will be retained.
  • Interest on debt for first-time buyers will remain deductible for a limited period – roughly 10 years. The deduction will be capped and phased out linearly to zero.

Who wins, who loses?

The abolition of imputed rental value taxation is more or less advantageous depending on the loan-to-value ratio, location and a property's need for renovation.

  • At current average low mortgage interest rates of 1.5%, tax deductions are limited. Though homeowners may already be disadvantaged at a 2.5% interest rate.
  • The lower the loan-to-value ratio, the more the home owner profits.
  • Since tax savings can no longer be achieved though renovations, the prices for old buildings could come under pressure.
  • New buyers benefit, since their tax deductions are initially still low.
  • The lower the imputed rental value set by a canton, the less beneficial the elimination. The price differences between new and already existing homes will therefore increase.

Four concrete cases

Case 1: Pensioners will disproportionately benefit. For one, the loan-to-value ratio is below average; what’s more, renovations are often protracted, meaning upkeep costs are lower. Cantonal range of tax savings: 1,000 to 3,800 francs annually.

Case 2: For buyers of new residences with a short-term time horizon, in the current system, tax deductions on mortgage interest and standard deductions for upkeep cannot offset the imputed rental value despite a higher loan-to-value ratio. Cantonal range of tax savings: 850 to 2800 francs per year.

Case 3: For buyers of new residences with a long-term time horizon, the tax savings fluctuate between 0 and 1,500 francs annually, considering actual deductions – even if they only result in extensive renovations and tax savings after 25 years.

Case 4Owners of old buildings should not experience any tax savings over the long term, even for an impending renovation. The additional tax burden resulting from the change in the system: 300 to 900 francs per year.

In a nutshell: efficient and comprehensible

The current system is not optimal and discontent among home owners is palpable. From an economic perspective, the treatment of homeownership as a consumer good and the elimination of imputed rental value and deductions for maintenance and debt interest appear to be efficient and sustainable solutions. We do not share the fear that property prices will increase at a low double-digit rate because of the change in the system. Developments in property prices depend on various factors. The system change comes into effect at the earliest by 2022.