Accrual and deferral of profit and income from real estate held as business and private assets (in particular sale and realisation transactions), taxation of rent and imputed rental value as well as ground rent
ISIS) seminar on 11-12 September 2017 - Accrual and deferral of profit and income from real estate held as business and private assets (in particular sale and realisation transactions), taxation of rent and imputed rental value and of ground rent
A. Taxation of profit and income from business property
1. private accommodation in a physiotherapy practice
Yolanda Siegenthaler is a physiotherapist. She spends two to three nights a week in a treatment room of her physiotherapy practice, opening a cot to save herself the 75-minute walk home. In her bookkeeping she leaves a private share of Fr. 1'800 for this, which is increased to Fr. 3'600 by the tax authorities.
- Does Yolanda Siegenthaler have a private share of the overnight stay in the practice?
- What changes if the way home is only 25 minutes?
2. sale of a hotel and restaurant property with loss of deposit
The married couple Adalbert and Olga Alder, born in 1948 and 1964 respectively, ran a hotel and a restaurant in Herisau (AR). The couple acquired the two properties in 1987 for CHF 10 million and mortgaged them with the Appenzeller Kantonalbank for CHF 7 million. In the end, the couple operated the restaurant and the hotel despite financial difficulties; they only maintained the property inadequately.
On 31 May 2014, the spouses agreed with the Appenzeller Kantonalbank to sell the property. In the liquidation agreement, the spouses agreed to continue to operate the restaurant and hotel in the best possible way; in return, Appenzeller Kantonalbank undertook to waive any loss of deposits.
On 1 March 2016, the two properties were sold for Fr. 5.8 million (book value and income tax value at the end of 2016: Fr. 5 million). The buyers transferred the proceeds of the sale to Appenzeller Kantonalbank. After the sale, the couple continued to run the restaurant as tenants for the time being. At the end of April 2017 they ceased operations.
Answer the questions under the following assumptions: Profit from operations: CHF 50,000 (2015); CHF 40,000 (2016), CHF 20,000 (2017). The spouses have no assets and no second pillar.
- How high is the business profit in 2016?
- Can the spouses apply for privileged liquidation taxation?
- What do you recommend to the spouses to reduce the tax bill in 2016?
B. Taxation of rent and imputed rental value of private property (including deduction of maintenance costs and interest on debt)
3. imputed rental value taxation, debt interest and maintenance costs of real estate in the case of cohabitation
Anna Meier is the sole owner of a single-family house, which she lives in together with her cohabitation partner Reto Lüthi. She has taken out a mortgage loan as the sole debtor to finance the single-family home.
Reto Lüthi will transfer a monthly contribution of CHF 4,000 to Anna Meier's salary account in 2017. This account will be used to pay maintenance costs and interest on debts, as well as common household expenses (food, etc.).
- Who has to pay tax on the imputed rental value and who can deduct the debt interest and maintenance costs of the jointly owned single-family home?
- Since Anna Meier has given up her job and is looking after their children, the bank is demanding that Reto Lüthi be jointly and severally liable for the mortgage loan when the mortgage loan is renegotiated. From 2018, interest on the debt, totalling CHF 2,000 per month, will therefore be paid in equal parts from Anna Meier's salary account, which will continue to receive CHF 3,000 from Reto Lüthi, and from Reto Lüthi's salary account. Who can now deduct the debt interest?
- Is the assessment of the deductibility of maintenance costs different if part of it is paid directly by Reto Lüthi?
- Are there other tax consequences if Reto Lüthi is 20% co-owner of the single-family home?
5. Anna Meier sells the property because she and Reto Lüthi have bought a new (more expensive) property (each with half ownership). She pays the bank an early repayment compensation of CHF 45,000. Can she claim a replacement purchase even though she now owns only 50% of the sale property? Can she deduct the prepayment compensation from her income tax?
- Are there other tax consequences if Reto Lüthi is 20% co-owner of the single-family home?
- Anna Meier sells the property because she and Reto Lüthi have bought a new (more expensive) property (each with half ownership). She pays the bank an early repayment fee of CHF 45,000. Can she claim a replacement purchase even though she only owns 50% of the replacement property? Can she deduct the prepayment penalty from income tax?
4. right of residence
Hedy Meier, widowed, is 80 years old. She lives in her own home in Oberwil (variant A: near Büren BE, variant B: near Nürensdorf ZH) together with her daughter Maria, 55 years old, who is also single. Both use the property in equal parts. Maria pays no remuneration. The imputed rental value is CHF 24,000 and the property tax value is CHF 700,000.
On 1 September 2017, Hedy Meier transferred ownership of the property to her daughter, while retaining a lifelong right of residence in accordance with Art. 776 of the Swiss Civil Code. The right of abode was publicly notarised, but not entered in the land register.
Civil law note: The usufruct according to Art. 745 ZGB can only be validly created if it is entered in the land register (Art. 746 Para. 1 ZGB); the right of residence is also valid without an entry in the land register, but in this case it cannot be held against third parties acting in good faith].
- Who taxed the imputed rental value before the property was transferred to the subsidiary?
- Who taxed the property tax value before the transfer of the property?
- Who pays tax on the imputed rental value since 1 September 2017?
- Who has been paying tax on the wealth tax value since 1 September 2017?
- Who will now bear the maintenance costs?
5. legal fees and court costs in inheritance disputes concerning apartment buildings
Jakob, together with his two nephews Nicolas and Norbert, formed a simple society into which Jakob had once incorporated an apartment building.
Jakob died in 2006, heirs in equal parts to his two nephews (Nicolas and Norbert) and two nieces (Tamara and Tanja).
When dividing the inheritance, Nicolas and Norbert claim to have already held one third each of the property before the death of Jacob because they had formed a simple partnership with the testator. Tamara and Tanja are of the opinion that although Nicolas and Norbert were simple partners, the apartment building had always remained the sole property of their father, which means that all heirs were entitled to one quarter of the property.
Tamara and Tanja obtained the appointment of a representative of the heirs, who filed a lawsuit against the community of heirs with regard to the division of the estate in order to determine their role. The process ended when the heir's representative was instructed by the court to file a suit against Nicolas and Norbert, according to which the apartment building was entirely entitled to the heirs. Costs of Fr. 10,000 (heir's representative) and Fr. 20,000 (lawyer) were incurred.
In the subsequent corporate lawsuit of the community of heirs, represented by the heir's representative or his lawyer, against Nicolas and Norbert, the heir's representative succeeded in inheriting the apartment building in its entirety (with own costs of CHF 10,000 and lawyer's fees of CHF 30,000 for the community of heirs).
As a result of the dispute, which lasted for years, the cantonal tax administration of Aargau assessed the community of heirs as a whole in accordance with § 10 para. 2 StG/AG in accordance with the rules applicable to natural persons.
The cantonal tax office of Aargau refused to allow the community of heirs to deduct court and attorney fees.
- Who is actively entitled to appeal against the tax ruling if the community of heirs is assessed as a whole?
- What costs are deductible for income tax?
- What about the deductibility of costs for inheritance and gift tax?
C. Taxation of ground rent and the waiver of rights from real property for consideration
6. building law
Thomas Werder is the owner of a property (apartment building) in Winterthur. In a publicly notarized contract dated February 2, 2017, an independent and permanent building right for a period of 50 years is established for this property in favor of Haus AG. The following values are known:
- Is the one-off compensation of CHF 12 million paid by Haus AG taxable for property gains or income tax if Thomas Werder holds his property as business assets?
- Are there other tax consequences if Thomas Werder holds the property as part of his private assets?
- Which part of the one-off compensation is taxable if Thomas Werder holds the property as private property?
- Which part of the one-off compensation is taxable if Thomas Werder holds the property as business assets?
- Can the one-off compensation for the income determining the rate be converted to one year (i.e. in this case, divided by a factor of 50)?
- How is the annual ground rent to be paid taxed?
7. withdrawal of a building course and waiver of an easement for a fee
Hans Meier is the owner of an older single-family house with a big turnaround in a suburb of the city of Zurich.
Grossbau AG has acquired two adjacent larger plots of land and is planning a development of several houses on them.
Hans Meier appeals against the building permit granted by the city. He claims that the development prejudices the layout of a planned new tram line through the quarter. If the development were to be built in this way, the tram line would only be able to run over the undeveloped part of his property, which would lose a great deal of its value.
Hans Meier and Grossbau AG agree shortly after the appeal was lodged that Hans Meier will withdraw his appeal for a fee of CHF 400,000.
- What tax consequences result for Hans Meier from receiving the salary of CHF 400,000?
- Option 1: According to the contract, the fee of CHF 400,000 is not intended to compensate for the damage caused by the prejudiced line management, but to compensate Hans Meier for the disadvantages that result for his property from the shadow cast by the neighbouring buildings. Will there now be other tax consequences?
- Variant 2: An indefinite easement in favour of Hans Meier's property is registered on the two neighbouring properties. According to this easement, construction on the two plots of land may only be carried out up to a maximum height of 5 metres from the ground. Hans Meier agrees to the cancellation of this easement for a compensation of CHF 400,000. Will there be other tax consequences?