Who pays taxes when using a property?

The statutory tax apportionment

When using real estate in Switzerland, the beneficiary (usually the parents) pays the majority of current taxes. He must both tax the imputed rental value (in the case of personal use) and the actual rental income as income and declare the full market value of the property as an asset. The owner (the child) is completely exempt from income and wealth tax for the pure property during the period of use.

Income tax: Where economic benefits are taxed

The tax treatment of income is consistently based on the reality principle when it comes to benefiting. Since the beneficiary has the legally securitized right to exploit the property economically, he is also subjectively taxable for all resulting inflows. If the parents continue to live in the house themselves after the gift, they must fully declare the cantonal imputed rental value as income in their personal tax return — exactly as if they were still the unrestricted owners of the property.

If living conditions change in old age and parents move, for example, to a barrier-free apartment or a care facility, the right of beneficiary generally remains in place. If the parents subsequently decide to rent out the house, the monthly rent income flows directly into their bank account. As a result, parents must tax this actual rental income as ordinary income. The children, who are in the land register as naked owners, do not see a cent of this money and therefore do not have to pay any income tax for the property.

The wealth tax: A clear allocation to the beneficiary

A common point of contention in families concerns the annual wealth tax. Since real estate in Switzerland often accounts for a significant proportion of total taxable assets due to continued increases in value, this tax has a noticeable impact. However, the Swiss Tax Harmonization Act (StHG) leaves no room for interpretation here: During the entire period of use, the beneficiary must declare and tax the full tax value (the cantonal appraisal value) of the property in his register of securities and assets.

For the gifted children, this legal regulation has an extremely charming side effect. Although they are already the legal owners of valuable property under civil law, their taxable assets in relation to that property remain zero. The law protects the young generation here from being overburdened by tax as a result of a lifetime gift before they even have economic control over the property. Only on the day on which the beneficiary (for example due to the death of the parents or as a result of a written waiver) is deleted from the land register does the asset go to the children for tax purposes.

Deductibility: Who can claim maintenance and interest?

Where taxes are due, corresponding deductions can usually also be claimed in the Swiss tax system. Since the beneficiary taxes income and assets, the Swiss Civil Code (ZGB Art. 756) also has the right to deduct the associated running costs for tax purposes. This primarily includes mortgage interest and regular, value-maintaining maintenance costs (such as repairs, painting or replacing the heating system).

Parents can either effectively prove these expenses in their tax return or — depending on the canton and age of the property — claim a lump sum deduction (usually 10 to 20 percent of the imputed rental value). In practice, this often results in a noticeable reduction in their tax burden. The children, on the other hand, cannot deduct any maintenance costs from tax, even if they have paid the tradesman bills out of their own pocket. If the children pay the maintenance, this is considered a hidden contribution to the parents that is not deductible.

The decisive difference: Ordinary vs. extraordinary maintenance

The legal distribution of costs between owner and beneficiary is regulated in detail in the Civil Code and forms the basis for tax deductibility. The law makes a strict distinction between ordinary and extraordinary maintenance:

• Ordinary maintenance (the beneficiary's responsibility): This includes all minor repairs and ongoing operating costs that are necessary to maintain the normal value of the property (e.g. service contracts for the heat pump, garden maintenance, minor repairs to the roof). The beneficiary must bear these costs and he deducts them from his tax return. It is also responsible for insurance premiums for building insurance and current property taxes.
• Extraordinary maintenance (property of the owner): If the property has to be fundamentally renovated — for example, comprehensive energy-efficient façade insulation, complete roof renovation or core replacement of the kitchen and bathroom — this is referred to as extraordinary repairs. These costs are borne by the children as owners under civil law. However, since the children do not tax income from the property, they cannot deduct these often immense costs from their income for tax purposes. This is a classic “tax trap” for restructuring during ongoing use.

Tactical optimization through the change of right of residence

Because children cannot deduct the large, value-maintaining restructuring costs for tax purposes as long as there is a benefit, many Swiss families choose the right of residence as an alternative when planning their estate. The right of residence is more restrictive than the right of use: The parents may live in the house themselves for life, but they may never rent it out to third parties.

The tax advantage of housing law lies in the flexibility of the distribution of costs. While the law rigidly prescribes the distribution of costs and taxes when it comes to beneficiary right of residence, the contractual arrangements in the donation agreement can be made more freely. If it is agreed that the children bear all maintenance costs (including ordinary maintenance), the children can deduct these costs from their own income for tax purposes in many cantons — provided that the right of residence has been set out accordingly in the contract.

Conclusion: Clear contractual arrangements prevent tax disputes

The basic legal rule for beneficiaries in Switzerland is unequivocal: The beneficiary pays income and wealth tax as well as ordinary maintenance, while the owner remains exempt from tax relief but must pay for major investments in return.

In summary, it can be stated that anyone who hands over a property to their children with a benefit should keep an eye on the exact condition of the property. If major restructuring is pending in the next few years, the beneficiation is often disadvantageous for the children due to the lack of tax deductibility of restructuring costs. In such cases, it is advisable either to have the restructuring carried out by the parents before the gift or to process the transfer via tailor-made, contractually optimised right of residence instead of a benefit in order to fully exploit the tax savings potential within the family.

Real estate use glossary

• imputed rental value: A fictitious income in Swiss tax law. Anyone who lives in Switzerland (or uses it as a beneficiary) must declare the economic rental value of this property as taxable income in order to ensure equal treatment with tenants.
• Utilization: A right in rem entered in the land register which grants a person full use and economic return (e.g. rental income) of a foreign property (e.g. property owned by children).
• right of residence: A highly personal right, enshrined in the land register, to live in a property or certain rooms of it yourself. In contrast to usufruct, re-letting to third parties is strictly excluded.