In Switzerland, home owners must add a fictional or imputed rent to their taxable income, which is calculated based on the home’s floor area. Proposals to eliminate imputed rent have been around for sometime. This week, the Federal Council came out in support of a plan to eliminate it put forward earlier by a commission of the Council of States, Switzerland’s upper house.
The Federal Council’s main motivation for changing the current system, which also allows tax deductions for mortgage interest and house maintenance, appears to be to remove the incentives it creates to borrow heavily.
The Federal Council also suggests removing imputed rent for second homes to simplify the system, continuing to allow interest deductions for homes that are rented out, and allowing deductions for renovations aimed at improving the environmental efficiency of buildings, a provision that would last until 2050.
Whether the changes reduce or add to the overall tax take depends on prevailing interest rates. If interest rates are high the tax deductions will generally exceed the imputed rent added to taxable income. So changing the system when interest rates are high will increase overall taxable income and bring in more tax money. With today’s low interest rates the opposite is true. At an interest rate of 1.5%, the federal, cantonal and municipal governments would lose an estimated CHF 1.66 billion under the changes suggested by the Federal Council. However, at an average mortgage interest rate of 3.5% the government would receive an extra CHF 150 million in income.