Taxation of real estate trading and determination of the real estate profit for business properties (including offsetting of business and real estate losses)

Case 1 Profit determination for residential buildings with sale

Basic facts

In 2003, A acquired from his parents two plots of privately owned land with two older residential buildings with the assumption of the mortgage and otherwise as a gift to be set off against the inheritance. He lived in one of the buildings himself, the other one he rented out.

In 2013, he decided to demolish the existing buildings and build over them with an apartment building with 6 apartments including an underground car park and 10 parking spaces. He commissioned an architect to design and prepare the building permit documents and then to supervise the construction. The two plots of land were merged and divided into 7 StWE (6 apartments, 1 underground car park, which is designed as StWE). A intended to keep 1 flat for himself and to sell 5; these were also put up for sale. A was able to sell 4 apartments (including 1 or 2 parking spaces each) at the intended price. He rented out the one apartment that was not sold and moved into the one intended for him. The sales, construction and readiness to move in took place in 2014.

A submits the following cost summary for the year 2014:

Questions

1. How do you assess the situation from the point of view of direct federal tax (without its exact calculation)?
2. How do you assess the situation from the point of view of state and municipal taxes (without their exact calculation) if the property is located in
   a) Canton Aargau?
   b) Canton Zurich?
   c) Canton Basel-Landschaft?
3. How is the tax consequences calculated and what additional information is required for this purpose?

Variant 1

Does anything change in the tax assessment if A acquired the properties with dilapidated buildings from a third party in 2012, financed the purchase with 70% borrowed money and 90% of the construction costs through a building loan and was able to sell the 5 apartments as planned (1 apartment he lives in himself)?

variant 2

A qualifies as a commercial property dealer who regularly carries out building work for the purpose of selling. He acquired the land with the dilapidated buildings in 2012 (as with option 1).

In 2013 A sold 2 apartments and 3 parking spaces, in 2014 he sold 1 apartment with 1 parking space and in 2015 3 apartments with 5 parking spaces. The apartments were ready for occupancy at the end of 2014 and all invoices for construction and sales costs were available by mid-2015. How will profits be reported and taxed in the years 2013 to 2015?

Variant 3

A qualifies as a commercial property dealer who regularly carries out building work for the purpose of selling. He acquired the land with the dilapidated buildings in 2012 (as in option 1).

All sales and the preparation of the construction statement took place in 2014. The construction statement shows a commission to X-AG (domiciled in the respective property canton) of CHF 90,000. According to the commercial register data, X-AG was founded in 2014. The spouse of A. is registered as a director. What tax implications does this commission payment have in the above-mentioned cantons?

Case 2 Offsetting business losses against real estate gains

Basic facts

In 2012, A. AG posted a net profit of CHF 6,500,000, including gross profit from property sales of CHF 7,200,000, which was made up as follows

From previous years, there were still loss carryforwards of CHF 3,500,000 which could be offset, as the property had been acquired exactly 30 years previously for CHF 1,300,000. In 2002, value-enhancing expenditures in the amount of CHF 3,300,000 were made. Depreciation was never made.

Task

Determine the taxable profit and the taxable real estate profit before and after loss offsetting as well as any loss carryforwards for the federal government and the dualistic cantons and for the individual monistic cantons (see also the factual supplements for the individual cantons).

Supplement the table on page 12 and compare the total tax substrates (taxable income plus taxable property gain minus losses carried forward to the following year) from the 2012 financial year.

Discussion points

1. Why are the results so different in the individual cantons?
2. How do you assess this case from a tax harmonisation perspective?

Supplementary facts for the cantons UR, SZ, NW

In the monistic cantons of UR, SZ and NW, the taxable real estate profit (with negligible deviations for the present case) corresponds to the gross profit from the sale of real estate calculated and excluded from profit tax (in our opinion, the taxable real estate profit in the canton of JU would also correspond to the gross profit excluded from profit tax in the present case). However, as we did not receive a corresponding confirmation from the canton of JU by the editorial deadline, it will not be dealt with in this report. The following regulations apply to the offsetting of operating losses.

Supplementary facts for the cantons BL, ZH and TI

In the monistic cantons of BL, ZH and TI, the market value (TI: valore di stima) of 20 years ago is used instead of the acquisition value for business assets with a long holding period. For simplification, it is assumed that this replacement value is CHF 6,500,000 in all three cantons.

Extract from the tax law of the canton of Basel-Landschaft:

See also the decision of the Cantonal Court of Basel-Landschaft Canton of 7 December 2016 (810 16 84), published at https://www.baselland.ch/politik- und -behorden/gerichten/gerichte/ Rechtsprechung/kantonsgericht/legislation/legal area/taxes-and-duties/downloads/2016-12-07-vv-4.pdf.

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Supplementary facts for the cantons of BE and BS

In the monistic cantons of BE and BS, in the case of long holding periods, a deduction for the duration of ownership is already made when determining the taxable real estate gain (not only when calculating tax). The applicable percentage can be found in the legal provisions:

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Case 3 Planning value added levy

Facts

B AG is the owner of a property in the commercial zone of a municipality in the Canton of Berne. On the property there is a storage building, which has been rented for a long time. As part of the community development, the area where the property is located is now to be rezoned into a zone for multi-storey residential buildings.

B AG is now considering what to do with the property:

• nothing, i.e. it is still rented out in the same framework;
• to a real estate developer;
• to start a project of his own and to build over the property with four multi-family houses and to keep it.

Questions

The board of directors of B AG comes to you and would like to know the tax consequences of the different options. It also asks for alternative proposals if they are financially more advantageous.

Case 4 Determination of profit for real estate companies

Facts

C is a real estate investor in the canton of Aargau and is currently considering a project in Zurich and a project in Geneva. Together with his investment company C AG, he establishes a special purpose vehicle (SPV), which then acquires the corresponding property. The properties are usually completely renovated or newly developed and then either rented or sold. The projects of C AG are to a large extent externally financed.

C AG also holds an SPV, Z AG, which owns a property in the city of Zurich in a prime location. From time to time, C AG receives purchase offers for this property.

Questions

1. C would like to know from you how he should structure his investments so that it costs the least in taxes.
2. He would also like to know how much tax the sale of the Zurich property will cost. Here too, he would like a proposal for the most tax-efficient option.

Case 5 Investment costs

Facts

B AG is the owner of a property in the commercial zone of a municipality in the canton of Basel-Landschaft. The B AG has planned and built a shopping centre with a multi-storey car park on it.

Already at the project stage, B AG concluded long-term rental agreements with the chain of shops C AG and other tenants. This is a so-called shell rent, according to which the tenant is responsible for the development of the corresponding shop space. The rental agreements also stipulate that the tenants are obliged to remove the tenant's fixtures and fittings on termination of the rental agreement. Also at the project stage, B AG concluded a purchase agreement with C AG for the space rented by it. In legal terms, this is the purchase of a floor unit with an associated co-ownership share of the general areas including the multi-storey car park. The purchase will not be completed until six months after the opening of the shopping centre.

VAT was opted for for both rental and sale.

Question

How is the land profit to be determined?

Facts variant

B AG has taken over and goes bankrupt shortly after the completion of the purchase transaction. There are outstanding invoices resulting from the creation of the shopping centre (general contractor, individual craftsmen, architect), which are included in the collocation plan by the bankruptcy administration.

Questions

1. How is the land profit to be determined in this case?
2. How about the canton of Solothurn?
3. How about the canton of Zurich?