Taxation of real estate trading, distinction from private asset management

Case 1: Legal entity with operating loss, credit against property gains tax

1. facts of the case

B AG, domiciled in Winterthur, sells its property in Zurich-Altstetten in 2022. As it reports an operating loss, it applies for a credit against real estate gains tax. The following data are known:

Variant

B AG has its registered office in Frauenfeld.

Questions

• What part of the gain from the sale of the property will be subject to profit tax?
• Will the fluctuation reserve be investigated by the cantonal tax office or by Grundsteuern Zürich? Why?
• Provided that the fluctuation reserve is accepted. How high is the property gain that would be taxable?
• What should be considered or calculated before filing the application for the credit of the operating loss against the real property gains tax?
• What considerations should be made in connection with the future of the company and the application for crediting the operating loss against the property gains tax?
• What should be noted regarding the timing of the assessment procedures (profit tax and real estate gains tax)?

Case 2: Natural person outside the industry as a real estate trader

1. facts of the case

An individual working as a cleaner purchases six properties within eleven years (2001- 2012) and sells four properties within six years (2006-2012), two of which were extensively renovated prior to sale. All property purchases were fully leveraged. In one case, the proceeds of the sale were reinvested. Furthermore, the obligor owned a real estate company.

Variant

The individual resided in each of the properties for a certain period of time prior to the sale.

Questions

• Which of the characteristics defined by the Federal Supreme Court for the existence of commercial real estate trading are fulfilled?
• Is there commercial real estate trading? What speaks in favor and what against?
• Is the investment in Immobilien AG business assets?

Case 3: General contractor AG with dealer overhead charge

1. facts of the case

The general contractor AG domiciled in the canton ZG sells a property in the canton BS. In the case of real estate gains tax, instead of the required flat rate of 12% for overheads, only 8% of the sales proceeds is granted. The general contractor AG starts its way through the appellate courts and claims that the refusal of the lump sum for overhead costs of 12% results in a prohibited double taxation due to the higher tax rate for the real estate profit tax in the Canton BS compared to the profit tax in the Canton ZG.

Variant

It is not a legal entity, but an architect who claims own services.

Questions

• Under what conditions can the tax administration set a lower flat rate?
• In its "Merkblatt des kantonalen Steueramtes zum Abzug besonderer Aufwendungen des gewerbsmässigen Liegenschaftshändlers bei der Grundstückgewinnsteuer" (leaflet of the cantonal tax office on the deduction of special expenses of commercial real estate traders for real estate gains tax), the Zurich tax authorities provide that a flat rate of 5% of the sales proceeds may be granted to noncantonal real estate traders. Does this apply absolutely?
• Is there a double taxation of the general contractor AG?

Questions about the variant

• How and when are accepted personal contributions taxable?
• Which tax jurisdiction covers own contributions?

Case 4: Architect with participation in consortium

1. facts of the case

A self-employed architect has a share in a limited partnership with 30 properties. He has newly built or converted various properties in his ownership.

He sells one of his properties to the owner of the neighboring property. He had previously filed a building appeal against the owner because of a planned replacement building. The neighbor then offered to buy his property.

The architect disputes the existence of business assets. He had purchased the sold property "for the joy of architecture". No alterations were made to this property, and the external financing was not excessive.

Questions

• Which of the characteristics defined by the Federal Supreme Court for the existence of commercial real estate trading are fulfilled?
• Is there commercial real estate trading? What speaks in favor and what against?
• If the Federal Supreme Court does not conclude that there is commercial property trading. What effects would the decision have on the consortium holding and the other properties?

Case 5: Fixed asset costs / recovered depreciation

1. facts of the case

A-Immobilien AG has owned an apartment building in Adliswil ZH since 1990. In 2000, two apartments were built in the spacious and until then unused attic.

For the sake of simplicity, the costs incurred were not capitalized, but recognized in the income statement as property expenses.

The property in Adliswil will be sold in 2022. The following dates are known:

For the real estate profit tax, A-Immobilien AG claims the market value 20 years ago. For the profit tax, the difference between the original and the current book value is taxed in the amount of CHF 0.5 million as reinvested depreciation.

Questions

• What is the problem with this accounting?
• How are the investment costs to be calculated?
• What would be the situation if, in the 2000 assessment, the tax authorities had noticed the booking of the attic conversion as part of a file request, but had refrained from increasing the book value?

Variant

• What would the situation be if A-Immobilien AG had not claimed the market value 20 years ago, but the actual investment costs?

Case 6: Expertise and professionalism

1. facts of the case

A self-employed master painter, acquires 2020 condominium ownership at 50% in a simple partnership. The partner of the simple partnership financed the purchase and subsequent conversion 100% with his own funds. The master painter carried out all painting work. The sale took place in 2022, the profit was divided in half, the master painter received his part as "compensation for the knowledge for the purchase of the property".

Questions

• Which of the characteristics defined by the Federal Supreme Court for the existence of commercial real estate trading are fulfilled?
• Is there commercial real estate trading? What speaks in favor and what against?
• What effect does the tax qualification of the master painter have on the co-partner?

Variant

It is not a master painter, but a pastor who contributes nothing to the project except a sum of money of CHF 100,000. His share of the profit is proportional to the investment.

Case 7: Liquidation taxation

1. facts of the case

Mrs. A, aged 66, a master painter in Kriens with a sole proprietorship, wants to retire from professional life. She decides to claim liquidation taxation. The sole proprietorship has hidden reserves in the amount of CHF 0.2 million. Furthermore, she owns a rented condominium in the city of Lucerne. The purchase of the apartment was a counter transaction. Ms. A received the contract for painting work in two newly built apartment buildings, but had to buy an apartment in return. The capital gain is expected to amount to CHF 0.5 million. Ms. A declared the property in the property register, she never had to pay social security contributions for the rental income.

Variant

Mrs. A is 71 years old. The painting business was already liquidated seven years ago, due to lack of hidden reserves without liquidation taxation according to Art. 37a DBG. The property is in a bookkeeping, depreciation can no longer be made. In addition to the capital gain of CHF 0.5 million, hidden reserves in the form of reinvested depreciation of CHF 0.2 million would arise.

Questions

• Is the condominium a business asset?
• If the condominium is a business asset, can it be included in the liquidation taxation?
• What options are available in the context of giving up self-employment?

Questions about the variant

• What options does Ms. A have to terminate this self-employment?
• What are the advantages and disadvantages and what is the best solution?

Case 8: Community of heirs

1. facts of the case

The community of heirs of an agricultural business, owns zoned land. There are repeated sales of industrial land, single-family houses and building land parcels. Up to the present time, there has never been any taxation as a commercial real estate dealer.

Two projects were realized:

Project V-Strasse: Development and sale of 33 condominium units. The qualification as commercial property trading is undisputed.

Project W Street: sale of ten plots developed by the municipality. The municipality approached the community of heirs and proposed the project to them.

Variant

The land originates from a nursery business that was transferred from a sole proprietorship to a legal entity. The land was never transferred to private property.

Questions

• Which of the characteristics defined by the Federal Supreme Court for the existence of commercial real estate trading are fulfilled?
• Is there commercial real estate trading? What speaks in favor and what against?
• At what point does commercial real estate trading exist?

Questions about the variant

• Was the land still in the business assets after the transfer of the nursery business?
• What should be considered when inheriting with respect to business assets?
• Can a sale without another qualifying act still be taxed as a business asset?

Case 9: Intercantonal elimination

1. facts of the case

Mrs. B., aged 70, is a professional real estate trader. She lives in the canton of ZG where she pays tax on her pension and the investment income from the securities register, in total CHF 80,000. In the canton of AG, she owns a multi-family house, which shows a cost surplus of CHF 300,000 as a result of a comprehensive renovation, and a condominium from which a net rent of CHF 20,000 is generated. In Canton SG, she owns an apartment building which she is now selling. Until the sale, rental income of CHF 10,000 was generated, the recovered depreciation amounts to CHF 90,000 and the capital gain is CHF 400,000.

Variant I

The sold property is located in the canton BS.

variant II

Mrs. B. also owns a property in the canton of ZG as business assets. Of the taxable income of CHF 80,000, CHF 20,000 is attributable to this property.

Variant III

Ms. B. is 55 years old and runs a sole proprietorship in the construction industry in the canton of ZG. This company built the apartment buildings (AG and SG), but not the condominium (AG). The taxable income in the canton ZG originates entirely from the self-employment.

Questions

• In which order do the three cantons take over the cost surplus?
• What is the tax segregation?

Case 10: Replacement new building with subsequent partial sale

1. facts of the case

A commercial employee with no connection to the real estate industry buys several properties from the family circle. Years later, the old buildings in need of renovation are demolished. An apartment building with six apartments is then built on the now united plots. Four of the apartments are sold.

Demolition of the buildings and replacement with new construction made sense due to the age and condition of the old buildings. Debt financing was higher than usual for private assets.

Questions

• Which of the characteristics defined by the Federal Supreme Court for the existence of commercial real estate trading are fulfilled?
• Is there commercial real estate trading? What speaks in favor and what against?

Variant

This is undeveloped land.