Special issues with real estate in business assets

Martin Huber

Samuel Ramp

Case 1: Sale of an apartment building

1. facts of the case

Heinrich Meister, 80 years old, married to Natalie, enjoys his retirement. As a former sanitary worker, he had acquired various properties during his self-employment. He has always been very critical of the stock market and stock market activity. He had no closer contact with the tax authorities in recent decades. His tax assessments were always made in accordance with the tax return submitted.

In addition to his owner-occupied single-family house and a vacation home, Heinrich Meister owns five apartment buildings (all in the canton of Zurich, in the vicinity of his place of residence).

With regard to the distribution of his estate (inheritance), Heinrich Meister wants to avoid discussions among his children. He has therefore sold two multifamily houses in 2021. The cash received from the sale is then to be used in the event of inheritance to offset the different market values of the remaining three apartment buildings. In fact, Heinrich Meister would like each of his children to receive an apartment building in the event of inheritance.

The real estate gains tax assessment of municipality A shows a real estate gain (calculated with the market value 20 years ago) of Fr. 525,000. Municipality B has assessed a real estate gain (also calculated with the market value 20 years ago) of Fr. 380,000.

Questions

What questions arise from a tax perspective?
Can the tax administration make a new assessment in the year of sale regarding whether the property sold belongs to private or business assets?
Should the tax administration have disclosed the tax qualification of the sold properties to the taxpayer earlier?
What additional problems arise if Heinrich Meister is classified as a commercial real estate trader or the properties sold are qualified as belonging to the business assets?

Case 2: Interim use

1. facts of the case

Produktions- und Vertriebs AG (hereinafter "PVAG") with its registered office in Zurich is a subsidiary of Y Group with its registered office in Italy. Due to the difficult economic situation and the limited refinancing possibilities, the Y Group has instructed PVAG to sell its property in Zurich, which was previously used for operational purposes, as soon as possible.

PVAG and Real Estate AG (hereinafter "REAG") agree on a purchase price of CHF 20 million for the property, without an option for the taxation of exempt services for value added tax. The transfer of ownership, the taking of possession and the payment of the purchase price shall take place immediately after the notarization of the purchase agreement.

However, PVAG wants to be able to use the property for operational purposes for two years after the sale. This is how long it is expected to take until PVAG has found a suitable rental property at an alternative location. REAG will need a similar amount of time, namely two to three years, to work out a development project for the property and obtain the necessary building permits. In order to avoid occupation, structural damage and, as far as possible, loss of income, REAG is interested in interim use of the site by PVAG. PVAG would like to spend as low an amount as possible for the interim use.

For the legal structuring of the interim use, PVAG and REAG are discussing the following variants:

a) Use loan
REAG undertakes to let PVAG use the property free of charge for at least two years (use loan). The draft agreement provides that PVAG shall bear all consumption-related costs and ordinary maintenance costs, including the costs for heating, hot water, water and sewage charges, electricity, caretaking, maintenance of the surroundings, servicing of appliances and equipment, as well as the usual costs for repairs and maintenance. However, the costs of replacing or repairing essential infrastructure (e.g. heating, ventilation, building envelope) are borne by REAG.
b) Limited rental agreement with option
REAG and PVAG conclude a limited rental agreement for two years. PVAG also receives the option to extend the lease by one year by unilateral declaration.

The interim use agreement is to be signed on the same day as the public notarization.

Question

From PVAG's perspective, what are the tax issues related to the sale of the property with respect to interim uses?

Case 3: Sale of an apartment building, 1⁄2 co-ownership

1. facts of the case

Daniele Filippo is the managing director and sole owner of Daniele Filippo Bau GmbH.

He lives with his family in a single-family house in Horgen, which was originally encumbered with a mortgage of CHF 555,000. In 2011, the mortgage was increased by Fr. 50,000, reduced again by Fr. 50,000 in 2015, reduced by a further Fr. 55,000 in 2016 due to a WEF advance withdrawal and increased again by Fr. 86,000 a little later and finally increased again by Fr. 49,000 in 2017, so that in 2019 there is still a mortgage of Fr. 635,000.

The following property transactions occurred from 2010 to 2019:

16.03.2010, purchase of multi-family house in Zurich, purchase together with Giovanni Mastrani, 1/2 co-ownership each, pro rata purchase price Fr 1'250'000, mortgage Fr 1'000'000, loan Daniele Filippo Bau GmbH Fr 50'000
16.04.2011, purchase of multi-family house in Thalwil, purchase together with Givoanni Mastrani, each 1/2 co-ownership, pro rata purchase price Fr. 750'000, mortgage Fr. 550'000, loan Daniele Filippo Bau GmbH Fr. 100'000, increase mortgage on private property Fr. 50'000
1.10.2017, purchase of multi-family house in Baden (Kt. AG), purchase together with Giovanni Mastrani, 1/2 co-ownership each, pro rata purchase price Fr. 1'000'000, mortgage Fr. 800'000, increase mortgage on private property Fr. 49'000
20.04.2019, sale of multi-family house in Thalwil, pro rata sales price Fr. 1'150'000, pro rata property gain Fr. 435'000, repayment mortgage Fr. 505'000

The co-owner is Giovanni Mastrani, managing director and sole shareholder of Mastrani Umbauten und Renovationen AG.