Investments in real estate (national/international)

Case 1: Expensive holiday home in St. Moritz

1. facts of the case

Luise Steinreich lives in Germany and also has a holiday home in St. Moritz in her private assets. She is demolishing this and having a new one built. This results in a deduction surplus for the 2022 tax period of CHF 250,000 (demolition costs), which cannot be offset due to a lack of other Swiss taxable income. Luise Steinreich earned investment income of around CHF 1 million in 2022, which she taxes in Germany.

Questions

• How should international tax allocation be carried out from a Swiss perspective?
• Luise is challenging the 2022 assessment because she does not agree with the international tax allocation, in particular with the transfer of the deduction carryforward to the country of residence. What procedural problems arise?
• For the 2023 tax period, Luise has to pay tax on net capital gains from real estate of CHF 50,000 in Switzerland. Can the deduction carryforward be offset?

Variant 1

Luise dies in 2023 and leaves behind two heirs, who will each inherit half of the holiday home in St. Moritz.

Question

• Can the heirs claim the deduction carryforward in 2023 and beyond, assuming that no offsetting against other capital income took place in the 2022 tax period?

Case 2: Tax treatment of project costs

1. facts of the case

The Dornacher couple, who live in the canton of St. Gallen, own several properties in various cantons of Switzerland, which they have acquired since the beginning of the 1990s. In July 2016, they purchased an undeveloped plot of land in Zofingen, Aargau, for CHF 850,000. In November 2016, they also purchased the neighboring plot for CHF 250,000. In total, the Dornacher couple took out a mortgage of CHF 200,000 for this purchase. The couple originally intended to build an apartment building on these plots of land and rent out the apartments. The couple commissioned an architectural firm to plan the project.

Since the area of the plots is subject to the development plan requirement according to the applicable building and use regulations, a development plan had to be drawn up first. This led to an initial delay in the construction project. After only one development plan was available in 2018, two construction projects were drawn up in 2019 and 2023. However, none of the projects completely convinced the Dornachers. Since Mr. Dornacher has also become seriously ill in the meantime, the couple decided to put the construction project on hold for the time being. By then, project costs (engineering work, development studies and strategic planning) totaling CHF 34,500 had been incurred.

In January 2024, Felix Tschudin makes Ms. Dornacher a purchase offer for the two land parcels on behalf of Tschudin Bau AG at a price of CHF 4 million. The parties then conclude a purchase right agreement in favor of Tschudin Bau AG in July 2024 and Tschudin Bau AG pays an option amount of CHF 150,000. The purchase right relates exclusively to the two land parcels.

Tschudin Bau AG then commissioned a development project at its own expense and, as the developer, obtained the relevant building permit. The Dornacher couple were not involved in this project and did not issue any instructions in this regard.

On December 28, 2024, the Dornacher couple on the one hand and Tschudin Bau AG on the other hand notarize and execute a land purchase agreement for the two land parcels. The purchase price amounts to CHF 3.9 million. The land purchase agreement defines the land parcels exclusively as the object of purchase. However, the contract stipulates that the Dornacher couple must hand over all documents relating to construction projects commissioned in the past upon request from Tschudin Bau AG. No such request is made.

Questions

• How should the project costs and the option amount be treated for property gains tax purposes?
• What question does the tax administration of the canton of St. Gallen ask itself with regard to income tax? Rightly so?
• What should be taken into account with regard to VAT?

Case 3: Hidden capital contribution

1. facts of the case

In 2019, Lorenz Edelmann transferred 5 properties located in the canton of Thurgau to a self-controlled stock corporation at investment costs. In 2024, the corporation sold one of the transferred properties to a third party (sales proceeds CHF 2.5 million; book value CHF 750,000).

Questions

• Outline the tax consequences of contributing to the corporation.
• Lorenz would like to receive part of the capital gains realized in 2024 as a dividend. Are there any tax consequences associated with this?
• Does the tax assessment change if the company has not sold any property after the transfer?

Case 4: Conversion of sole proprietorship into corporation

1. facts of the case

Ms. Häfeli, who lives in the canton of Schwyz, inherited five apartment buildings (built between 1970 and 1975) with a total of 45 apartments in the canton of Zurich in 1995. All apartments are rented out to third parties. In 2023, Ms. Häfeli earned net rental income of CHF 2,050,000.

CasAdmin GmbH, Zurich, is responsible for managing Ms. Häfeli's properties. Under a corresponding management contract, it takes care of technical administration, rental, debt collection and billing. In 2023, CasAdmin GmbH charged Ms. Häfeli a fee of CHF 75,000 for managing the properties.

Since inheriting the property in 1995, Ms Häfeli has invested regularly in the properties. In 2001, this resulted in costs of CHF 1,500,000 for the extension of a building and in 2012, costs of CHF 350,000 for the expansion of the gardens at another property. Then, in 2019, Ms Häfeli renovated all of the houses to make them more energy efficient for a total of CHF 1,050,000.

Up to and including the 2021 tax period, Ms. Häfeli always declared the properties as private assets. In the 2022 tax return, she declared the properties as business assets for the first time. Ms. Häfeli is now reaching an age where she wants to settle her estate. Since Ms. Häfeli has three children and in order to prevent the sole ownership of the properties under civil law from having to be divided into joint ownership, she has the idea of contributing her properties to a stock corporation based in the canton of Schwyz. However, she only wants to implement this request if it does not entail any significant tax consequences.

The original investment costs of the properties are not known. Up to and including the 2021 tax period, Ms. Häfeli declared the properties at a wealth tax value of CHF 14.5 million.

Questions

• How should the transfer of real estate from private to business assets be assessed for tax purposes?
• What are the tax consequences of transferring the properties to a stock corporation in light of the answer to the first question?

Variant 1

In 2022, Ms. Häfeli commissioned FutuRE GmbH, a real estate developer, to develop a project for a total renovation of her properties that is as climate-efficient as possible. She intends to look for one or more investors to implement it. The transfer of the properties to business assets and their incorporation into a stock corporation must be seen against this background.

Questions

• How should the transfer of the properties into business assets be assessed now?
• What values must Ms Häfeli enter for the properties in her tax return for the 2022 tax period?
• How should the planned transfer of the properties to a stock corporation be assessed?

variant 2

Same starting situation as in variant 1. However, Ms Häfeli's properties are not located in the canton of Zurich, but in the canton of St. Gallen.

Question

• How should the transfer of the properties into business assets be assessed now?

Case 5: Congruence principle

1. facts of the case

In 2000, Alexander Maier bought a property built in 1971 for CHF 600,000 (land share CHF 350,000) and has since made value-enhancing investments of CHF 100,000 on it. Since 2010, building maintenance has been severely neglected. Alexander has only claimed the property maintenance allowance in his tax returns. In 2023, Alexander will sell the property for CHF 750,000 to an institutional investor who wants to build an apartment building on it.

Questions

• What does the congruence principle say?
• How should the present case be assessed?
• Can the application of the congruence principle be prevented by asserting the cantonal replacement value?

Variant 1

The institutional investor is prepared to compensate for the value of the building and also pay a "package premium" because he wants to outdo other interested parties. The agreed purchase price is CHF 3 million (market value including building CHF 2.3 million). In return, Alexander has already obtained the demolition permit from the local municipality.

Question

• Can the congruence principle be applied?

Case 6: Sale of a real estate company

1. facts of the case

Julius Meyer, resident and tax resident in Germany, holds 100% of the shares in C AG. C AG is a real estate company with numerous properties in the city of Zurich and in Winterthur. The shares in C AG are clearly to be classified as private assets.

On July 1, 2024, Mr. Meyer will sell all shares in C AG for CHF 35 million to a stock corporation based in Zurich.

Question

• What are the tax consequences of this sale?

Variant

C AG now exclusively holds properties in the canton of Thurgau.

Question

• To what extent do the tax consequences differ from the basic situation?