In the previous post we went over on why having a foot in real estate may make financial sense. In this post we will focus on how to compute the actual taxes and costs involved in buying property. We will also compare the differences in costs between both buy-to-live and buy-to-let scenarios.

Taxes in buying property in Switzerland

Let’s start with everyone’s favorite topic: taxes. There are 5 different ones when owning real estate.

Income tax (“Einkommenssteuer”)

Income tax is calculated differently depending if you live in your property or not. For buy-to-let it’s simple, the rental income is added to your taxes as income. For buy-to-live an imputed rental value is added to your taxes as income.

The income tax largely depends on your Canton and municipality (“Gemeinde”). Income tax tends to be higher in french-speaking Switzerland and lower in the german-speaking part.

Buy-to-live: Imputed rental value (“Eigenmietwert”)

This tax leverages the playing field between renters and homeowners, as owners can deduct several costs from their taxable income such as mortgage interest and maintenance costs (full list coming below). The imputed rental value balances these deductions and makes taxes more fair.

A rough rule of thumb is that the imputed rental value is between 50 and 70% of the true rental value.

Wealth tax (“Vermögenssteuer”)

Unlike other taxes, wealth tax does not target income or profit but rather what you own. You pay a small percentage, usually in the tenths of a percentage point. The mortgage can be deducted from your wealth tax as a debt, so you only pay wealth tax on the part of the property that you actually own.

For example for the city of Zurich, the wealth tax on 1 million swiss francs (CHF) is 0.18% (i.e. ~1800 CHF). For a comparison between all Cantons see this link from Vermögenszentrum.

This tax is unlikely to make a significant difference in your calculations. It is also somewhat irrelevant in the calculation because even if you don’t have an investment in real estate but rather holding the same amount in cash (or stocks or anything else), this tax will still be due.

Property tax (“Liegenschaftssteuer”)

Property tax is just a special kind of wealth tax, that focuses exclusively on real estate. Unlike wealth tax, this targets the value of the property, regardless of owning a mortgage or not. This tax usually ranges from 0.1% to 0.3%, however most municipalities and cantons do not levy a property tax, likely because it largely overlaps with wealth tax already.

One-off: Real estate gain tax (“Grundstückgewinnsteuer”)

Once you sell the property and since it tends to appreciate over time, a real estate gain tax will be due. This is a form of capital gain and only applies on the profit that you have made. The range here is quite high, it typically starts at 40% and can go down to 5% if you hold on to it for a long time. The longer it is in your possession and the smaller your profit, the lower the tax typically is. The formula depends on your canton.

You can deduct the property transfer tax, real estate agency commission fees (in some cantons), the investments that increased the value of your property and any fees that you incurred due to prematurely ending a mortgage from this tax.

This tax can be postponed if you live in this property, sell it and buy another one to live in it.

One-off: Property transfer tax (“Handänderungssteuer”)

Once a property is transferred, another tax is due. The property transfer tax is typically between 1% and 3%. Depending on the canton the buyer and seller share this tax.

Some cantons do not charge a property transfer tax but rather a higher fee as part of the land register entry.

Tax deductible: Maybe. Depending on the Canton, this can be deducted from your real estate capital gain tax.

Costs

We’re not done with spending money. 😅 There’s still many costs involved in owning a house that we have to go over. Luckily, many of those can be deducted from your taxes.

Mortgage interest

As mentioned in the previous post, mortgages are the star of the show when buying a property. They significantly boost your rental yield. This is one of the largest deductions you can take, as your mortgage interest payments can be removed from your income tax.

Tax deductible: Yes.

Amortization

Switzerland requires that your mortgage eventually only covers two thirds of your property after 15 years. This means that if you start by only owning 20%, you have 15 years to own an additional 13.3%. For a buy-to-let property you have to own 25% from the start and only have 10 years to reach the additional 8.3%. Typically it is assumed that you are amortizing about 1% per year.

Tax deductible: No. This money is directly reducing your debt and increasing the percentage of the house that belongs to you.

Management fees (“Verwaltungskosten”)

This is optional but highly recommended for both buy-to-live or buy-to-let properties. If you live in an apartment building with multiple other tenants, a management agency can take care of a broken lift, finding a new janitor and general maintenance of the property. Costs are between 400 and 1000 CHF.

For buy-to-let I think having a management agency is even more important. Personally, I would not want to trade a higher rental yield for more work. Dealing with tenants can be very time consuming and I’d be happy to pay the fees required here. A management agency typically charges 5% of your net rental income for handling day-to-day issues. It will not handle finding new tenants nor a tenant handover. If you want that, they typically charge 12%.

Tax deductible: Yes.

General maintenance (“Instandhaltungskosten” or “Unterhaltskosten”)

Owning a property means you can no longer call your landlord and ask them to fix or replace a broken oven. You are on the hook for any repairs. Every ~40 years or so you should also do a structural restoration (“Kernsanierung”) of your property, which can be very costly to do. For this reason it’s recommended to save 1% of your property value for future use.

Tax deductible: Yes, partially. You can only deduct the actual costs, not what you save for future renovations. You also can’t deduct anything that is potentially increasing the value of your property, such as building a new winter garden or replacing a linoleum floor with a higher quality floor such as marble (in this case you get a partial deduction, since a floor needs to be renovated after regular intervals anyways; anything maintaining value can be deducted). Alternatively, you can make a standard deduction (“Pauschalabzug”) even if you didn’t have any costs. This standard deduction depends on your Canton and is typically between 10% and 20% of your rental income or imputed rental value. If you take the standard deduction, you can not deduct management fees, building insurance nor any maintenance costs from your taxes.

This article from Vermögenszentrum explains this deduction in detail.

Building insurance (“Gebäudeversicherung”)

There are two kinds of building insurance, one of them being required by law in Switzerland. The first one is typically controlled on the cantonal level and insures you against fire and natural disasters (mostly floods and storms). The second one is a more standard insurance that covers you against general water damage, such as pipe bursting, a washing machine leaking water, or rain water infiltrating walls and damaging the building structure. Nonetheless both insurances are somewhat trivial and should cost together about 0.1% of your property value.

Tax deductible: Yes.

Sort of a cost: risk of rent loss (“Mietausfallrisiko”)

Obviously this only applies for buy-to-let. As a property owner, you risk losing income if your property is empty. Typically this is computed as 3% of the net rental income per year, this is however a fictional cost. At the moment the number of empty number of swiss properties is quite small (below 1%).

It is very important that you check the number of empty properties in the region you’re looking to buy and also the tenant history of the property. It should not have a history of lack of tenants nor of tenants not paying rent.

Tax deductible: Sort of. You can’t deduct the risk, but obviously you don’t pay tax on rental income that was lost.

Sort of a cost: building depreciation

This is more of an invisible cost but over time your building is depreciating due to its age. In most Cantons you can deduct a part of the value of your building (not the property itself) as depreciation. This is the deduction I found the least information about but it seems to range from 1% to 2% and depends on the age of your building.

Tax deductible: Yes, even though you didn’t directly occur this cost.

One-off: Real estate agency commission (“Maklerprovision”)

Buying a property is typically done via a real estate agency. The agency typically charges a fee between 2% and 3% of the price. This is typically paid by the seller but may be shared.

Tax deductible: Yes, from the real estate gain tax.

One-off: Notary fees (“Notargebühren”, “Kanzleigebühren” or “Grundbuchgebühren”)

Notary fees vary a lot depending on the canton. Together with the property transfer tax this can cost up to 5%. Canton Aargau doesn’t charge any property transfer tax and the the notary fee goes from 0.4% up to 0.7%, depending on the property value. Canton Zurich charges a flat 0.2%. This cost is usually shared between buyer and seller.

Tax deductible: No.

One-off: Property price analysis (“Immobilienbewertung”)

It is highly recommended to get an expert to evaluate your property in-person before you buy for any potential defects. Specially if buying an apartment building, a specialist will be able to do a deep analysis of the building materials an identify any potential problems before your purchase. Costs between 1000 and 3000 CHF.

Tax deductible: No.

Summary: Differences between buy-to-live and buy-to-let

Many of the taxes and fees are treated differently if you buy a property to rent it to others or to live in it.

Here’s a brief summary of the differences:

• For buy-to-let you must have a downpayment of at least 25% instead of 20%.
• For buy-to-let your income does not play a role when choosing a mortgage. What plays a role is that your rental income minus costs (mortgage interest at 5%, amortization, management and maintenance costs) are still a net positive.
• For buy-to-let you must reduce your mortgage to two thirds within 10 years instead of 15.
• For buy-to-let you can’t use any money from pillar 2 nor 3.
• Real estate gain tax can not be postponed if you don’t live in it.

Let’s now simulate a couple of different scenarios:

1. A buy-to-live apartment in a desired city such as Zurich.
2. An apartment building (“Mehrfamilienhaus”) in a non-central location.

Scenario (buy-to-live): Apartment in Zurich

Here’s a typical property in Zurich:

• Somewhat modern, very central location, 1 bedroom apartment, 70m2 (taken from homegate.ch, archive snapshot [ignore price and size from snapshot])
• Property price: 1.3M

Let’s also assume that:

• Your marginal income tax: 35% (salary of ~200k in Zurich, no kids, no church tax)
• Downpayment: 20%, which is the minimum. 1.3M * 20% => 260'000 CHF.
• Mortgage: 80%. 1.3M * 80% => 1'040'000 CHF.
• Mortgage interest rate: 2%. 1'040'000 * 2% => 20'800 CHF.
• You live in apartment building with 6 other apartments, sharing maintenance, management agency and building insurance costs (~1% per year) => 13'000 CHF.

We’re going to ignore wealth tax in this calculation as it doesn’t matter if you’re investing in your own apartment, stocks or just holding cash.

Your imputed rental value can be computed as 4.25% of 70% of the property price, according to Zurich tax information. Concretely this means 1.3M * 4.25% * 70% => 38'675 CHF per year in imputed rent (3'222 CHF per month, which to be honest sounds unlikely for this specific apartment).

I think the property above could rent for 2'750 CHF per month (33'000 CHF per year). This shows that the total costs in owning this apartment (35'506 CHF) are greater than renting already. This investment would have a negative yield and we didn’t even compute the required mortgage amortization.

What makes this investment more interesting is if you consider that it is appreciating in value. If we assume that Zurich will continue to appreciate at ~4.5% per year, after 10 years your property would be worth 1.3M * (4.5%) ^ 10 => 2.01M. Let’s assume the real estate agency and other taxes cost 3% => 60'000. This is a capital gain of 2M - 1.3M - 60'000 => ~640'000 in 10 years if sold, which would be taxed at 31%. 640'000 * (100% - 31%) => 441'000 or 44'100 per year.

44'100 (from appreciation) minus 35'506 (costs after taxes) => +8'594 CHF per year. With a downpayment of 200'000, this represents a yield of 4.2%. That’s not bad, but a continuous appreciation of 4.5% per year sounds unsustainable.

Scenario (buy-to-let): Apartment building with 4 units in Glarus

Let’s now simulate buying a small apartment building with 4 apartments in Mitlödi, Glarus (taken from homegate.ch, archive snapshot [ignore price and size from snapshot]). The property is fully renovated, so no big investment predicted for the near future.

Their sales dossier has the following information:

• Property price: 1'190'000 CHF
• Gross rental income: 61'440 CHF
• Additional costs (Nebenkosten): 8'000 CHF
• Net rental income: (61'440 - 8'000) => 53'440 CHF

Let’s make the following assumptions:

• Your marginal income tax: 35% (salary of ~200k in Zurich, no kids, no church tax)
• Downpayment: 25%, which is the minimum for buy-to-let. 1.19M * 25% => 297'500 CHF.
• Mortgage: 75%. 1.19M * 75% => 892'500 CHF.
• Mortgage interest rate: 2%. 892'500 * 2% => 17'850 CHF.

This is a yield of 8'854 / 297'500 => 3.0%. An amortization of 1% per year would cost an additional 11'900 swiss francs, which puts the yield in the negative. However amortization is not a cost, this money goes directly to your networth, reducing your debt, so this is not added to the calculation.

In Mitlödi, property prices went up by 94% in 20 years, which is an annual average growth of 3.4%. If we assume a more conservative 1.5% growth, this means the property would be worth 1.19M * (1.5% ^ 10) => 1.38M after 10 years. Let’s assume we sell after 10 years and the real estate agency and other taxes cost 3% => 41'400. This is a capital gain of 1.38M - 1.19M - 41'400 => 148'600, which would be taxed at 36.5%. 148'600 * (100% - 36.5%) => 94'000 or 9'400 per year.

9'400 (from appreciation) plus 8'854 (rent after costs) => +18'254 CHF per year. With a downpayment of 297'500, this represents a yield of 6.1%. That’s a very decent return on investment.

Note that for both simulations we are still missing taking building depreciation and notary costs into account, though they are unlikely to change the picture too much.

Conclusion

Buying a property in a desirable, urban and central location is likely to be more expensive than renting. However, appreciation of such areas can not be ignored and may turn a ‘bad’ purchase into a reasonable investment.

Properties in more rural or remote area can be a good investment, even ignoring appreciation. They do come with much more management and analysis requirements than simply investing in stocks.