Imputed rental value abolition – impact on renovations

In theory, tax deductions for renovations lead to more renovation than needed. Yet, the data doesn’t indicate excess renovation in recent years. Cost-adjusted investment in renovations per single-family home has fallen over the last 20 years. Overall, less is being invested in renovation and replacement construction than the building stock is losing in value due to age.

In practice, renovations are carried out when they are seen as necessary or cost-effective. The higher the price level, the more is invested in renovations. For example, investment in renovations per single-family home in the cantons of Zug and Geneva are more than twice as high as in the cantons of Aargau, Neuchâtel or Uri, where prices are lower.

Investments in property maintenance are likely to increase by 20 to 30 percent if the system changes, depending on the rate of income tax. There will also no longer be an incentive to bundle renovations and opt for relatively more expensive options for smaller repairs, such as replacing kitchen appliances. The overall low level of renovation activity over the last decade indicates that a significant decline in investment in conversions is unlikely.

Without tax deductions for repairs and energy-related deductions at the federal level, the financial incentive for eco-friendly renovations decreases significantly. For example, thanks to tax deductions and subsidies, facade insulation in combination with the replacement of a fossil fuel heating system with a heat pump in single-family homes can (just about) be amortized within the lifetime of the investment.

Assuming that the cantons maintain their existing deductions, energy subsidies would have to increase by almost 80 percent to compensate for the lower tax deductions. If the cantons also abolish energy tax deductions, subsidies would have to increase by around 150 percent on average across the country in order to keep the net expenditure incurred by owners stable. This would require at least half a billion euros in additional subsidies, which currently seems unlikely without counter-financing via a higher CO₂ tax.

The abolition of tax deduction does not fundamentally jeopardize the goal of CO₂ neutrality, but it does slow down the acceleration of energy-efficient renovation. At current energy prices, simply replacing fossil fuel heating systems with heat pumps in single-family homes remains financially attractive even without tax deductions. Accordingly, there is no clear correlation between the amount of subsidy and the replacement rate for heating systems, which puts the significance of the tax deduction for investment decisions into perspective. However, additional investments in energy efficiency are likely to be postponed for cost reasons.

Given low interest rates and without a tax on imputed rental value, homeowners will have more money at their disposal and could therefore finance renovations more easily in the long term. The previous system, however, subsidized maintenance-related investment through tax deductions. Despite that, we’ve not seen excessive renovation in recent years. Certainly, neither the level of tax deductions nor subsidies play a central role in reducing the use of fossil fuel heating systems.