Are mortgage payments tax deductible
Taxes and Mortgage
Tax factors are important to consider when determining the mortgage amount. This is particularly related to the legislation in Switzerland: Interest on debt can be deducted for tax purposes - in return, the rental income or a so-called imputed rental value must be taxed as income. But taxes are not only changing on income, but also on wealth. When changing residence, all taxes must be calculated and compared based on the new tax domicile. If you change the tax community, it is advisable to compare the new tax situation with the old one - so there are no surprises. The following taxes can be incurred in connection with real estate, or the following topics are relevant depending on the initial situation.
Topic overview - mortgage and taxes
Change in taxable income
Anyone who buys their own home and lives in it themselves does not generate any income with the own funds invested. If the same person were tenants, the money would yield interest income and dividends, which would have to be taxed. If you didn't live in the property yourself, you would generate rental income that would also be taxable. The tax authorities therefore expect fictitious income, the so-called imputed rental value, for owner-occupied properties. This is included in the income tax return. This means that homeowners have to pay something indirectly via the tax return for living in their own four walls. The amount depends on how much rental income could be generated with the property if it were let to third parties. However, the method of calculation and thus also the amount of the imputed rental value in relation to the property value vary from canton to canton. As a rule, the imputed rental value is lower than the possible market rent that can actually be achieved. You can find out more about this here:Imputed rental value for properties
Mortgage: Calculate change in taxable income
Online tool: Calculate the change in taxable income after buying a property:
Political discussion on imputed rental value
There is regular political debate in Switzerland about whether the imputed rental value should be abolished. If the imputed rental value were abolished, the debt interest deduction would presumably also be abolished with a few exceptions. Those with a low mortgage would benefit most from this. You can calculate online what financial consequences an abolition of the imputed rental value would have for you:Online calculation: Abolition of imputed rental value
Influence of the mortgage amount
The higher the mortgage, the higher the deductible debt interest. What influence this has on the effective tax calculation can be calculated using the individual marginal tax rate. You can find more about the marginal tax rate here:Marginal tax rate
Change in taxable assets
The property does not have to be taxed at purchase or market value, but at tax value. Depending on the canton, this is significantly lower than the market value. In return, the mortgage debt can be fully deducted from taxable assets. This means that the taxable assets are slightly lower after buying a property than before buying the property. Since the wealth tax for most taxpayers is low compared to the income tax, the change in wealth has only a relatively minor impact on the tax situation.
Taxes when changing hands
Depending on the canton, transfer taxes apply. The tax office in which the property is located can best provide information about the amount. In addition, land register and notary fees are due. These are also very different depending on the location of the property. When selling, depending on the initial situation, the so-called property gains tax is added. The amount varies depending on the holding period of the property, investments made during the holding period and the sale price. If a property is given away or inherited, gift or inheritance taxes may also apply. You'll find more about it here:Transfer costs for real estate
In the case of investment properties, there is no imputed rental value because the owner does not live in the property himself. However, the net rental income must be fully taxed. This is a major disadvantage of real estate as an investment. Here, too, the following applies: In our opinion, only comprehensive advice can assess whether or not it makes sense to buy an investment property. From a tax point of view, real estate tends to be of little interest as a financial investment (income taxes, property gains taxes, etc.), but for diversification considerations it can be recommended for a suitable financing concept for a property. It is absolutely crucial to calculate the real net return (after taxes and all other direct and indirect costs). This is best possible using an investment calculation that also shows the tax effects over a longer period of time.
Real estate taxes: keeping records
When it comes to taxes, it is important that all documentation related to a property is retained until it is sold. Otherwise, maintenance and investments in the event of a sale cannot be documented. Under certain circumstances, this can massively and unnecessarily increase the property gains tax and result in further disadvantages.
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