Buying property in Switzerland

Question

I have a legal right to buy property in Switzerland and I was thinking of renting it out as passive income in a stable, war-free country.

However, I have heard that it is really unprofitable because of a variety of taxes. I am already paying income taxes in Switzerland. Which taxes would I be paying on the property?

I plan to buy an apartment for 500,000 (for easy calculations), and rent it out at 1000 CHF. At the same time I am renting an apartment myself at 1200 CHF (I cannot afford to buy it, so I cannot live in an apartment I could potentially afford).

I would be taking a mortgage for 300,000. I heard I can write the mortgage rates off the property taxes and the extra income (rent) taxes. I heard also it is different when I am paying rent myself, because that too can be written off.

I would be really grateful for a sample calculation that would show me what deducts from what or if I forgot any factors (especially that). I understand that tax values may differ between cantons, any sample canton will do - I am just trying to assess if it's a feasible idea.

Answer 1

Obviously, you should ask your bank or financial advisor, but as a rough starting point:

Income tax

• Rent received is added to taxable income
• Rent saved by living in self-owned property is added to taxable income
• Mortgage interest is subtracted
• expenses for maintaining the property (but not expenses that increase the value of the property) are subtracted, but only up to a yearly limit.

Wealth tax

• The value of your property will be assessed, and added to your taxable wealth.
• As usual, debts (such as the mortgage) are subtracted from your taxable wealth.

Grundstückgewinnsteuer

• If you sell a property at a higher price than you bought it at, part of the difference goes to the state. The proportion is lower the longer you have owned the property. For briefly owned properties, it may be as high as 60%.
• If you sell the property at a lower price, you get no refund (nice try ;-))

Handänderungssteuer

• When selling real estate, a few percent of the purchase price go to the state (in some cantons)

Liegenschaftssteuer

• While owning real estate, a fraction of a percent of the value goes to the state every year (in some cantons)
• Mortgage is not subtracted

Conclusion

Aside from the usual income and wealth tax, there are special taxes for value gain, transactions, and owning property. Of these, the Grundstückgewinnsteuer (real estate gains tax) is particularly noteworthy, and can be punishing for briefly held properties. It's worth noting that Switzerland knows no capital gains tax, so investments in real estate are at a tax disadvantage to investments in securities.

It's also worth noting that renting is quite strongly regulated in Switzerland. In particular, the Supreme Court has held that the profit margin from renting must not exceed 2%. That is, if mortgages cost 1.5%, rents must be below 3.5% of the capital invested.

Answer 2

I have zero knowledge of Switzerland tax law and as such it really doesn't seem necessary. This is a terrible idea.

Lets assume that you can buy a place for 500K, and that your rent is 100% profit. It won't be, but lets assume so. That comes to a rate of return of 2.4% year. That is terrible.

You might argue that you will only be investing 200K and borrowing the 300K, so we should do the calculations against that number. Okay doing some basic research Swiss mortgage rates are very low. I see quotes as low as 1.67% where here in the US the prevailing rate is over 5%. I feel that there are additional fees, but whatever.

Lets assume that you borrow 300K for 30 years at 1.6%. Again your rental fees are 100% profit. The service on the loan is 1049.82. You will be losing $50/month in the best of all highly unrealistic scenarios.

Unless I am missing something this makes zero sense.

Edit: As CactusCake wisely points out, in the loan scenario you will be gaining an every increasing amount of equity in the property with each loan payment. In year 10, for example, each month will result in about $756 of equity on your balance sheet.

However, my assumptions are overly unrealistic. IIRC most landlords only expect to take home about 50% of rents due to vacancies, repairs, and other hindrances. Instead lets be overly optimistic, and say you clear 75% of the rent.

At year 10 you will receive $506 per month to your balance sheet (750 rent + 756 equity - 1050 loan payment). This results in about a 3% return on your original equity, or about 2.2% on the current equity.

There are less risky, less work schemes of making far more money then the investment you propose.

Answer 3

I'm not sure of Swiss tax laws or property and NOT a provider of investment advice. I supply this information of my personal experience.

Before doing anything you need to get together a good team. Tax lawyer, Property advisor and real estate management agent.

Most countries seem to have similar tax laws. When you buy a property you get rent and can depreciate the value of the property (cash less deduction) over 30 years (in Australia) and the interest are the major components.

You need to remember there are other costs that are involved i.e. insurance, property tax, water costs, electricity costs. You need to ensure you have money for maintenance and future upgrades of the property.

In Australia property prices rarely dropped because people wouldn't sell when it was bad. Property price growth usually keeps up with inflation. With property value growth you can take a larger loan on the property to either do renovations or purchase another property. Repeat again and again.

If you are looking at long term property investment you might want to get a interest only loan and purchase via a company that has lower tax rates but might increase the cost of the mortgage these are good questions for your advisors.