Do I have to pay tax on my overseas property?
Wherever you live you pay income taxes on all worldwide taxable incomes as well as a wealth tax on mobile assets such as an investment portfolio in the UK or even the Grand Caymans. This rule, however, has a limit when it comes to foreign real estate because of its immobile wealth. Any income from foreign real estate and wealth is not subject to cantonal and municipal taxes or the direct federal tax.
But! This will nevertheless affect your Swiss tax bill since both the value of a property as well as the earnings or imputed rental value are taken into account to determinate the applicable RATE of your Swiss tax return.
Do I also have to pay imputed rental value even when I don’t live there?
Effective use is present if the owner holds the property as continuously available, even without ever having lived in it because the tax law here assumes that the owner takes the economic advantage of continuous availability of the property. The taxation of imputed rental value then is waived if the property is empty because no tenant could be found, although evidence of this will be required.
The ownership of a foreign property which the owner keeps continuously at their disposal raises a tax liability for the full rental value. If such a property is temporarily rented, this sets the taxable income on a pro rata basis in a proportion comprising of rental income and rental value.
So, if I rent my foreign property to one of my good friends for a peanut, does that mean that I don’t have to pay tax on foreign imputed rental income?
The taxable rental value remains for the owner if their rent their apartment or house for a minimum amount or at an obvious preferential price to a third party.
But, how is an imputed rental value calculated?
According to tax law in the canton of Zurich, a foreign property is rated at market value. The imputed rental value depends on the market value, which corresponds to the average value of a property of equal or similar size, location and nature in the area. This is calculated, approximately, as 70% of the market value, and the imputed rental value will be then 3.5% if it’s a house or 4.25% if it’s an apartment.
What about the deduction of foreign mortgages?
Normally there are also debts and debt interest on a mortgages attached to a foreign property. These will be distributed according to the location of assets in each country and subject to an international tax elimination.
Can I also deduct costs for maintenance and renovation of my gross rental income or my imputed rental value?
Not in all cantons…
In the canton of Zurich there is the possibility that the deductible costs for maintenance, insurance and management of the property, exceed the gross rental income, or imputed rental value. The result is a so-called surplus production cost - that is actually a loss. In a minority of cantons, such as Zurich, Basel-Stadt and Graubünden, these maintenance costs are taken as income minus income from abroad which means that these expenses are tax deductible.
Most of the other cantons, as well as the federal government, argue against a minus income from abroad only in rate determining.
Please note that this is simply a rough overview to show you the system of taxation of overseas properties in Switzerland in a little more detail. The information contained in this article does not constitute advice and does not replace a visit to a qualified consultant.