Tax challenges for commercial real estate

Case 1: Overall circumstances and intention when acquiring the property

1. facts⁰¹

Mr. and Mrs. A live in the canton of ZH. Mr. A is the owner of a painting and plastering business. Over a period of 30 years, he and his wife have acquired six properties. In 2011, Mr. and Mrs. A purchased a property in the municipality of X for CHF 750,000. At the time, they financed the purchase with a mortgage (CHF 500,000). On the other hand, they gave their life insurance as security (total CHF 250,000). They hold this property (like the others) as an investment. They wish to preserve their assets in this way and intend that they will one day be inherited by their daughters in this form. Half of Mr. and Mrs. A's assets are invested in real estate.

At the end of 2023, Pension Fund B contacts Mr. and Mrs. A. Pension Fund B is the owner of the neighbouring plot in the same building zone in X. It is planning a major development and is therefore very interested in the property of Mr. and Mrs. A (development and transfer of use). Pension fund B therefore makes Mr. and Mrs. A an unexpectedly attractive offer. They decide to sell and sell the property to Pension Fund B for CHF 2,600,000. They retain their other properties.

The ZH tax office assesses a taxable income of CHF 1.8 million from the sale for direct federal tax and after deduction of an AHV provision and the purchase and sale costs.

Questions

• Which indications are generally regarded as an expression of commercial activity? Do all the indicia always have to be fulfilled?
• What speaks in favor of commercial activity on the part of A?
• Why not?

⁰¹ Judgment of the Federal Supreme Court 2C_702/2021 of April 21, 2022; see also judgment of the Federal Supreme Court 2C_643/2021 of October 13, 2022, E. 8.

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Case 2: Circumstances during the holding period 

1. facts⁰²

Spouses A.A. and B.A. live in the canton of Zurich and own other properties in various cantons (one owner-occupied apartment in Zurich, the others are investment properties). A works in a construction-related industry.

In 2012, A.A. and B.A. acquire a property (apartment building) in the canton of SO for CHF 3.5 million. The mortgage amounts to CHF 2.6 million (75%). During the holding period from 2012, A.A. and B.A. intensively manage the property themselves (various trips to the property and office work, meetings with the janitor, settling disputes between tenants, carrying out and/or coordinating repairs, handing over apartments, inspection tasks, etc.). At some point, however, the workload becomes too much for them and they delegate the property management to a third party. Over the years, most of their management costs are not deductible for tax purposes.

In 2017, they sell the property in SO for CHF 4.3 million. The sale is apparently also the result of extensive personal efforts by A.B. (extensive [including tax] preliminary clarifications, preparation of sales documentation, obtaining advertisement offers, carrying out viewings). This is the first time that A.A. and B.A. have ever sold a property.

The ZH tax office assesses A.A. and B.A. for direct federal tax and, after deducting an AHV provision and the purchase and sale costs, for taxable income of CHF 500,000 from the sale.

Questions

• Is it relevant that the property was apparently always classified as private property during the holding period?
• What speaks in favor of commercial activity on the part of A.A. and B.A.?

⁰² Judgment of the Federal Supreme Court 2C_643/2021 of October 13, 2022.

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Case 3: Simple partnership, debt financing, systematic approach

1. facts⁰³

A owns a total of eight properties in sole ownership. A owns three further properties acquired in 2006, 2010 and 2011 jointly with B (in a simple partnership). In 2006, A acquired a property for CHF 2.1 million, which he transferred to a simple partnership with B in 2008. B is a long-standing friend and business partner. In particular, B has the necessary real estate expertise.

When acquiring his properties, A pursues the same clear financing strategy in each case: he specifically looks for and acquires properties whose market value is higher than the purchase price. The difference enables A to prove to the banks that he has the "own funds" required to obtain the mortgages. These "hidden reserves" therefore serve as equity from the bank's perspective. De facto, A does not need its own liquid funds for the purchases.

In 2019, A and B fall out and want to go their separate ways in future. They sell the jointly held properties. The disputed property from 2006 is sold for CHF 7.4 million.

The ZH tax office classifies A and B as commercial real estate dealers and subjects the sales profit to direct federal tax. However, A argues, among other things, that contrary to the opinion of the tax office, he is not 100% leveraged. For this assessment of the degree of debt financing, the transport routes are decisive. Based on the respective properties, it was also clear that the market value could be realized relatively easily, which shows that his risk was not that great. The purpose of the simple partnership was not to trade in real estate, but merely to hold and manage properties. Moreover, he had never wanted to sell the property, but had only been forced to do so due to the unfortunate dispute with his business partner.

Questions

• Is the question of financing generally a question of fact or a question of law? What is the situation here?
• Is the reference to external circumstances that force the sale helpful?
• How is the merger into a simple partnership assessed in this context?

⁰³ Regarding A: Judgment of the Federal Supreme Court 9C_632/2023 of January 22, 2024; regarding B: Judgment of the Federal Supreme Court 9C_613/2023 of January 22, 2024.

Case 4: Commercial property and succession planning

1. facts of the case

A (75 years old) is a retired baker and widower. His four children are adults. All parties live in the canton of ZH. A still holds the Zurich property of his former and now closed bakery as business assets. This property is rented out. a therefore also pays AHV on the rental income - despite his age^.04

A would like to organize his estate. The property is to pass to his four children in the long term. Each child is to receive an equal share.

A has the following alternative options in mind:

• He gives the property to the children directly during his lifetime;
• He bequeaths the property to his children on death;
• He makes a private withdrawal and contributes the property to a new real estate company. He then bequeaths it to his children;
• He makes a private withdrawal and sells the property at its investment value to a new company that he and his four children already own in equal ^shares05

Questions

• What happens when a property is donated or bequeathed from business assets?
• Can A claim a tax deferral under Art. 18a DBG?
• Can A bequeath or sell the real estate company to his children?
• What should be considered when selling the property to a company in which each of the parties has a 20% stake?

⁰⁴ Cf. the case in the judgment of the Federal Supreme Court 9C_897/2013 of June 27, 2014.

⁰⁵ Cf. the case in the judgment of the Federal Supreme Court 9C_335/2023 of October 26, 2023.