Many people in Switzerland own a holiday apartment or holiday home. The problem is that holiday homes are vacant for the majority of the time, but still have to be financed and maintained all year round. That’s why it makes sense to rent out the property to cover the costs involved. Thanks to platforms such as AirBnB or Homeaway, it has become much easier to manage the rental process and property owners are becoming more amenable to the idea of renting out their holiday homes. That said, the rental of apartments and homes does harbour certain tax and VAT-related stumbling blocks, which we will outline below.
The management of one’s own assets, especially the rental of property, does not usually constitute a form of self-employment. While renting out a property inevitably entails work for the owners, the rental income is essentially classified as investment income, rather than income from self-employment. The tax implication is that tax is payable on the rental income received during the period in which the property has been rented out, but not on the imputed rental value for the same period. Mortgage rates and actual maintenance costs, while taking account of certain restrictions, can be deducted from the income; costs relating to the rental properties including any consumption costs not passed on to tenants, rental expenses and annual fees associated with the property are deductible. Alternatively, most cantons in Switzerland allow property owners to deduct a flat rate of 10-20% (depending on the age of the property) of the annual gross rental income or imputed rental value without providing documentation of the costs. Wealth tax is payable on the taxable value of the property minus any mortgage debt. If the property is sold from the owner’s personal assets, any profit from the increase in value is only subject to the cantonal property gains tax. In terms of direct federal tax, the capital gain realised as a result of the sale is tax-free.
It is often difficult to determine what the difference is between private asset management and (secondary) professional or commercial activity. The following criteria offer some guidance on what features are attributed to self-employment:
Not all of these criteria have to be met, as evidence of just one of the above may be sufficient to qualify as self-employment depending on the circumstances. The economic relationship between a person’s professional activity and the income they receive from renting their property may be used as an example. If you are an architect, trustee, builder or similar, the economic link between the property and your freelance activity may be viewed as evidence that the rental of the property constitutes a regular investment beyond the scope of private asset management and therefore qualifies as self-employment activity. The tax implication is that contributions to the old-age and survivor’s pension system (AHV) are payable on the net profit from the rental income and the property is classified as part of the business assets. At the same time, the property can be depreciated and maintenance costs are fully deductible; in general, however, the flat rate deduction cannot be applied. If the property is sold, the difference between the sales proceeds and the book value is now subject to direct federal tax. In terms of cantonal tax, the profit is subject to either income tax or property gains tax (depending on the applicable system), or a combination of the two in the event of recovered depreciation. In addition, AHV contributions are payable on the profit from the sale.
In accordance with article 21 paragraph 2 figure 21 letter a of the Swiss Federal Act on Value Added Tax, the renting of residential and sleeping accommodation for guests is generally considered a taxable service. The landlord is under obligation to pay value added tax if the activity qualifies as a «business activity». In line with the practice of the Swiss Federal Tax Administration, the definition of self-employment according to the social security and income tax law is used to assess whether the rental constitutes a business activity. If it does and the gross rental income (including additional costs and services) generates a turnover of at least CHF 100,000, the landlord will be liable to pay tax. As a result, the landlord will have to register for VAT and the total rental income will be subject to a special VAT rate of 3.7% for accommodation services. At the same time, the input tax deduction for costs relating to the rental property/properties can be claimed if the effective method of calculation is used. The turnover achieved from selling the property is generally exempt from VAT. Thus, if the property is sold the tax implications are similar to those for self-employment as outlined in the paragraph above.
If the landlord is already liable to pay VAT due to his or her main profession as a sole trader, according to the practice of the Swiss Federal Tax Administration the rental of the holiday home will constitute part of the individual’s business if the gross rental income exceeds CHF 40,000.
Helga Kadar
Fiduciary Officer, Fiduciary Services Switzerland
helga.kadar@swisspartners.com
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