Land held as private property
Workshop by Toni Hess, Daniel Bader, Rachid Ghazi and Hanna Brozzo on the occasion of the ISIS) seminar on September 12/13, 2022, entitled "Land in Private Property".
Case 1: Value-preserving ↔ Value-enhancing investments ↔ Living costs / Energy-saving measures / Deconstruction costs
1. basic facts
Giovanni Eroini is the owner of a house located in the municipality of Samedan, which he purchased in 2019 at a market value of CHF 920,000. While the first floor, which he has rented out, is occupied by a hairdressing salon, he lives on the first and second floors with his wife and two children. The attic is neither insulated nor developed and serves as a loft. The property belongs to the private property of Giovanni Eroini.
In 2020, Mr. Eroini had his house - excluding the first floor - rebuilt and renovated. Accordingly, he claimed the costs for the following investments in his 2020 tax return:
a) Throughout the house the walls were freshly painted. In the bedrooms the parquet floor was renewed.
b) In the living room the old fitted carpet was torn out and replaced by an oak parquet.
c) A wall was torn out between the living room and the kitchen and a fireplace was installed.
d) The attic was insulated to reduce energy consumption. It continues to be used as a screed.
e) Variant to lit. d): The attic was not only insulated, but additionally converted into an apartment.
- How should the maintenance and renovation work carried out by Mr. Eroini on his house be assessed from a tax law perspective? What expenses can he deduct for tax purposes?
- Which date is decisive for the deductibility of value-preserving investments: the invoice date or the payment date?
- What is the legal situation if Mr. Eroini accidentally fails to declare certain value-preserving investments in his tax return and therefore claims them as value-enhancing investments years later when he sells the company?
2. facts variant 1
After the hairdresser has terminated the rental contract, Mr. Eroini has his house extensively renovated. According to the construction bill, the total costs amount to CHF 1,025,000. After the reconstruction or the total renovation of his house, a new official valuation was carried out, which shows a market value of CHF 1,920,000.
Specifically, Mr. Eroini is making the following investments:
- On the first floor he has the hairdresser's salon turned into a 5-room apartment.
- On the second floor, he has an interior wall torn out to create a large kitchen-living room. He also had a balcony built.
- He has the second floor completely hollowed out and a new room division made.
- The staircase is moved from the inside to the outside.
- The attic will be insulated and converted into an apartment.
- How should Mr. Eroini's investments be qualified for tax purposes?
- Are any dismantling costs (e.g. dismantling of electrical installations) deductible?
3. facts variant 2
Mr. Eroini refrained from a total renovation after buying the house in 2019. Instead, he installed - two years after he bought his house - a photovoltaic system (on the roof of his house) with a battery storage in the tax period 2021. Its capacity is less than 100kWp (kilowatt peak). In addition, he had the house totally insulated (including the roof), new windows installed, the seating area completely roofed over and glazed to extend the living space, and a new kitchen installed.
- Photovoltaic system with a battery storage: CHF 60'000 (of which CHF 15'000 is for the battery storage). Mr. Eroini receives subsidies from the canton of Grisons for the construction of the photovoltaic system or a one-time payment in the amount of CHF 18,000 (small one-time payment, KLEIV). The one-time payment in the sense of Art. 25 EnG has replaced the cost-covering feed-in tariff (KEV, Art. 7a aEnG).
KLEIV can be applied for photovoltaic systems with a nominal output of less than 100kWp since 2018. Operators of plants with an output of 100kWp or more can apply for a large one-time payment (GREIV).
- Insulation of the whole house: CHF 400'000.
- New windows: CHF 50'000.
- Roofing and glazing of the seating area to extend the living space: CHF 25'000.
- Replacement of the kitchen: CHF 30'000.
Net income (= total income less profit costs and general deductions [before deduction of social deductions]) of Mr. Eroini in the tax period 2021 before taking into account the above costs: CHF 145,000.
- Can investments that serve to save energy and protect the environment be deducted for tax purposes? In which cases?
- a) Is Mr. Eroini's investment in the photovoltaic system and in the battery storage system one that serves to save energy and is deductible?
b) What would be the legal situation if Mr. Eroini did not install the photovoltaic system on the roof of his house but in his garden?
- What are the consequences of the KLEIV in the amount of CHF 18,000 from a tax perspective?
- What would be the legal situation if Mr. Eroini deducted the entire investment for the photovoltaic system in the amount of CHF 60,000 when paying in 2021, but does not receive the KLEIV in the amount of CHF 18,000 until 2022?
- What do you think about the expenses for the insulation of the whole house, for the new, energetically better windows, for the roofing and glazing of the seating area to extend the living space and for the replacement of the kitchen?
- How much are the energy-saving and environmental protection costs that Mr. Eroini was not able to deduct in full in the 2021 tax period? What can Mr. Eroini specifically claim with regard to these costs?
- Why can the question of whether property costs incurred are (merely) of a value-preserving nature or serve to save energy/protect the environment be of significance?
- What is the legal situation with regard to the costs of the photovoltaic system in the case of a total renovation?
4. facts variant 3
Mr. Eroini does not use all the electricity produced for his own use. He feeds the excess energy into the grid. For this, he receives a feed-in tariff (so-called redelivery) of 10.
- How is the feed-in tariff treated for tax purposes?
- Mr. Eroini's photovoltaic system does not supply enough energy, especially in the winter months. Therefore, he purchases energy from the power company in the amount of 6.
What is now considered taxable income?
5. facts variant 4
Mr. Eroini holds his property as business assets. It should be noted here that the operation of a photovoltaic system on an owner-occupied property does not generally constitute self-employment.
- Which provisions apply in this constellation - in principle as well as with reference to the basic facts and the facts variant 1?
Case 2: Congruence principle for GGSt / comparable circumstances / increase & decrease in substance
1. basic facts
Stefanie Ernst is the owner of a property located in the city of Zurich (Sihl Manegg), which she inherited from her then deceased mother in 2009. The debt-free property was valued at CHF 7,800,000 by Wüest & Kunz at the time of inheritance.
At the time of inheritance, Stefanie's parents' house stood on the property, in which her mother Ernst lived until her death. The factory owner's villa, built in the 1890s, has always been in the family. It had a lot of surrounding land and was ideally situated between the Sihl River, the highway and the Sihl Valley Railway. The extensive park is beautifully nestled between two branches of the Sihl and is surrounded by old trees.
The financial means of the Ernst parents, however, did not allow for major renovations during the last years. However, it was enough for the necessary maintenance. At the death of the mother, the property was in a modest but habitable condition. The same applies to the park, which required a lot of care and maintenance.
Stefanie was able to realize her dream due to solvent personal finances and carefully restored the villa from 2010 to 2013. She invested primarily in energy-saving and heat-insulating equipment. In addition, an elegant swimming pond was added to the park and the antique pavilion was completely adapted to today's energy requirements. A detailed summary of the energy/value-enhancing measures as well as the new construction of the pool amount to CHF 2'200'000.
The villa is in the middle of a long-term pilot project for the 2000-watt society. Urban life and dense living are spreading. The steadily rising real estate prices, falling interest rates and ultimately the development in the neighborhood led Stefanie to join the local project development in 2015 and develop the property together with a general contractor.
Four stylish apartment buildings, each with 7 apartments (90 square meters each), were built on the property. Based on the planned sale of the individual properties, the estimated market value is CHF 42,840,000, and the construction costs amounted to approximately CHF 12,600,000.
Stefanie Ernst intends to sell between three and ten apartments directly to private friends and rent out the rest.
- What are the basic tax issues or topics that arise for Stefanie Ernst in connection with the sale of the apartment buildings?
- How is the property gains tax or the relevant investment costs calculated?
2. facts variant 1
As part of the planning of the apartment buildings, a condition was imposed that the outer shell of the historic factory owner's villa, including the natural pond, be retained. With regard to the neo-Rococo garden pavilion with its herringbone oak parquet flooring, the figurative stuccowork and the marble cladding, the monument protection authorities became active.
Ms. Ernst agreed with the authorities that the pavilion would be kept true to the original, but could be moved locally within the existing property. The corresponding monument protection work amounts to about CHF 500,000.
Accordingly, three more apartment buildings can be built on the remaining plot. The factory owner's villa was lovingly integrated into the project and expanded with modern office space. Stefanie Ernst again intends to sell between three and ten apartments directly to private friends and to rent out the rest.
Due to the very attractive office space, a total of around CHF 37,000,000 could be raised (villa with offices and three apartment buildings). The construction costs remained unchanged at around CHF 12,600,000.
- Will there be any changes to the amount of property gains tax or the basis of assessment due to the new zoning and historic preservation requirements?
3. facts variant 2
In 1992, Stefanie Ernst's mother inherited a considerable fortune from her sister in the USA. She decided to move out of the old villa into a modern city apartment, which she had remodeled to suit her age.
She continued to maintain the garden around the factory owner's villa as a hobby. The actual villa, however, which had been severely neglected for years, was left to weather. The factory owner's villa only offered a home to birds, foxes and mice. The pavilion was mainly occupied by pigeons.
In this condition, Stefanie Ernst inherited the property on the Sihl in 2009. Since she and her partner had been living in the USA themselves since 2005, the property remained fallow for many years. The villa served ProNatura as a hedgehog breeding station.
In 2015, Ms. Ernst decided to implement the project described at the beginning (basic facts) and to proceed as in the facts above.
- Does the fact that both Mrs. Ernst's mother and Stefanie Ernst completely neglected the property change anything in the investment costs for property gains taxes?
Case 3: Building project of a community of inheritors
1. basic facts
Mrs. Zürcher (widowed) transferred an (unencumbered) building land parcel on the outskirts of Zurich with 15'000 m2 to her two descendants in January 2022. There are no other legal heirs. In the contract (contract on transfer of ownership - mixed gift), the following was regulated, among other things:
- Purchase price payment in the amount of CHF 15,000,
- The acquisition of the land is made by the descendants "as a result of anticipated community of heirs in joint ownership in equal shares",
- The gift portion is not to be settled in the estate of Mrs. Zürcher,
- All tax debts in connection with this property are to be borne by the descendants. Should such taxes accrue to Mrs. Zürcher, the descendants shall hold Mrs. Zürcher harmless.
Together with her brother, Mr. Berner, Mrs. Zürcher received this property in equal shares from her mother (who died in 2002) as a gift in 2000. The mother was already the sole owner of the property before 1960. In 2011, Mr. Berner (childless, unmarried) transferred his share to Ms. Zürcher by way of gift. No gift or real estate gains taxes were levied at that time.
The building land parcel currently lies fallow (undeveloped meadow) and was previously taxed at the income value. It represents(s) private property for the aforementioned persons and has not been subject to the provisions of the Federal Land Law for several decades. A rezoning (improvement of the possibility of use) has not taken place since the year 2021.
The following values are available:
- The descendants intend to build four apartment buildings on this parcel. These are to be rented to third parties (no (partial) sale intended). For the purpose of checking the financial feasibility, they would like to know what taxes they will incur in connection with the construction project and in what amount. It is to be worked with the assumption that construction will start at the end of December 2022.
- At the latest after completion of the construction project, each of the two descendants would like to hold two apartment buildings in sole ownership. The fictitious assumption is that the individual apartment buildings are identical in value, each with an equal share of the land, and that the increase in value due to the construction project corresponds to the investments. They reject the creation of condominium ownership over all apartment buildings. They would like to know when the division is to be made without incurring additional taxes.
Facts variant 1
Mrs. Zürcher is not widowed, but married. The remaining factual elements remain unchanged, in particular the parcel will only be transferred to the two descendants in 2022.
- Does this variant change the tax consequences with respect to the division of the plot by the descendants?
Situation variant 2
The walls of an old (no longer usable) barn are still standing in the middle of the parcel. As stated in the basic facts, the parcel is taxed at the income value (CHF 1/m2) as part of the private property. Likewise, the remaining elements of the facts are unchanged compared to the basic facts.
- Clarifications have shown that a parceling off with the currently still existing barn would be costly, since the new property line runs right through the middle of the barn. The descendants would therefore like to know whether it is fiscally sensible to carry out the parcelling only after demolition or removal of the barn.
Case 4: Tax treatment of easements
1. basic facts
A is the owner of the built-over plot x. The investment costs of the property amount to CHF 20 million, the market value is CHF 30 million. Behind property x is a slightly elevated property y of B. B wants to ensure that she keeps her beautiful view of the Alps and proposes to A that he grants her an easement (plant and building height restriction) in favor of her property y and at the expense of his property x. The easement is granted in return for a fee. As consideration, B offers A CHF 1 million. A agrees. A corresponding easement agreement is concluded and the easement is entered in the land register.
- How should the compensation of CHF 1 million be recorded for tax purposes at A?
- Can B claim the payment as a deduction for tax purposes and, if so, for which type of tax?
2. facts variant 1
The property x is located at the Greifensee in the canton of Zurich and is only built on with a small, old single-family house. The larger part is undeveloped, in particular the entire right half (viewed from the lake). B enjoys lake views from her property y thanks to the sparse development of property x. She would like to preserve this for her property and submits to A the proposal to establish a building ban for the undeveloped, half part as easements in favor of her property y and at the expense of property x. She offers to pay A a fee for this. In return, it offers a consideration of CHF 3 million. A again enters into the deal. The purchase price of the entire plot of land (without building) was CHF 2 million, the market value (without building) today is CHF 8 million.
A few years later, A receives an extremely attractive offer from a prospective buyer for property x. However, the prospective buyer only wants to purchase the property if the building ban is cancelled in advance. However, the prospective buyer only wants to purchase the property if the building ban is cancelled beforehand. B has died in the meantime and her heirs, who live abroad, have rented out property y and are not interested in it any further. A offers the heirs CHF 3.5 million for the cancellation of the building ban. The heirs accept the offer.
- How should the compensation for the construction ban of CHF 3 million be recognized for tax purposes at A?
- How should the compensation for the construction ban of CHF 3 million be recognized for tax purposes at B?
- How should the replacement of the construction ban be assessed for tax purposes for the heirs?
- How should the redemption of the construction ban be assessed for tax purposes for A?
3. factual variant 2a)
Property x in the Canton of Zurich is undeveloped. A grants B a building lease on plot x, for which B pays a one-time compensation of CHF 1 million and an annual building lease interest of CHF 30,000.
The arrangement of the building law is as follows:
- Subvariant 1: Irregular personal easement, i.e. building right in favor of B, which is transferable and inheritable, with the maximum permissible duration of 100 years. In this subvariant 1, B subsequently sells the building right to C for CHF 100,000;
- Subvariant 2: Regular personal easement, i.e. building right in favor of B, which is neither transferable nor inheritable;
- Subvariant 3: Easement, i.e. building right at the expense of plot x and in favor of neighboring plot y.
- How is the compensation for the granting of the building right in the various legal forms to be assessed for tax purposes at the recipient?
a. Irregular personal easement
b. Regular personal easement
c. Regular personal easement
- How should the resale of the building lease be assessed for tax purposes in sub-variant 1?
4. factual variant 2b)
Facts as in variant 2a, but plot x is now built over. B pays A compensation of CHF 500,000 for the existing building in addition to the aforementioned amounts (one-time compensation and annual building lease interest). Subvariants as in variant 2a).
- How should the one-time compensation of CHF 500,000 for the existing building be recorded for tax purposes in sub-variants 1 to 3?