I mean for the purpose of paying less in Grundstuekgewinnsteuer (or whatever the tax on gains is called) when we eventually sell. I heard that we have 2 years from the purchase date to do any value-adding home improvement work if we want it to count toward increasing the house "purchase value". So the question is, who and how determines which work caused house value increase and which didn't? For example, if the old kitchen was practically unusable, can we add the whole cost of the new kitchen to the house value?
I am hoping someone had a similar experience and can shed some light... We bought a house a few months ago, in kanton Zurich. It needed a good amount of work but nothing without which one couldn't live in it. Things like removing old worn wall-to-wall carpeting and laying new floors, tearing down wallpaper, redoing the walls and painting, etc. All the appliances worked except the baking oven, but were really old (straight from the 80s!) and the kitchen cabinets were kinda falling apart. We managed to get the seller lower the price by 20K to go towards replacing the kitchen. So now that that's been done and I've tallied up all the expenses I am wondering how much of it we can officially increase the value of the house by?
I'm absolutely not an expert on the situation but I just went through this without success, so I know a little. Others here know more so may add or correct to what I'm about to say.
I think that the situation isn't about changing the purchase price per se, but its about any modifications you make to your house to REFURBISH it can be tax deductible against your income tax. I didn't ever hear about capital gains being changed, but maybe I'm wrong.
The test which my tax lawyer explained to me was the "gold taps" test. So, if you move into a house which has basic services which are in need of replacement and you replace your old taps with new taps - you can claim against your income tax. However, if you replace them with gold taps which add value to the house, you can't claim.
I can't quite follow the logic of this though - if you do $100k of renovation work, you claim that back and have it deducted from your tax liability at say 20%, so you pay $20k less tax. However, by definition, this adds value to your house - you bought it with a crap kitchen and now it has a nice kitchen so the house is worth more (even if no gold taps). So lets assume that your $100k of work adds $100k of value to the house when you eventually sell. You will them pay capital gains tax on that increase at 20% (?) - so you will pay an additional $20k at sale....so its a zero sum overall. Am I missing something here? (in other words, this scheme was always explained to me that it is to encourage housing stock to be well maintained, but I think the only advantage is tax deferral, not tax reduction?)
Anyway, my claim was unsuccessful as my new house is being converted from an office to a home, so all the services were new and so added value...so I may not have the details right as I didn't get to follow it through
To add to the gold taps rule, everything has a life cycle. IE, you can't change appliances every 5 years and expect to get a tax deduction. There is a list out there giving those life cycles.
As CC said you only get 20% of the value of what you spent as a deduction on the year bill. I'm not sure though if you can add the total costs for capital gains or if it's a % as well.
AbFab is the queen of all capital gains tax info. Perhaps do a search with AbFab in the criteria.
I don't quite get any of the direction this thread is taking.
AFAIK you can claim costs of materials for renovations on the house against your taxes - doubtless there will be a cap, there always is.
With regards to taxes, you don't want to increase your eigenmietwert by telling them your house is worth more. That just seems dumb.
With regards to re-sale value, it is what the market will bear. Your sale taxes will then be based on that. If you sell within a certain period your capital gains tax will kick in - with some exceptions, but again that is dependent of the sale value of the house. If someone sees the renovations you have done as useless, then they are not going to take that into account when putting in an offer for your house.
So why exactly do you want to increase the value of your house in the eyes of the tax man?
I think he's misunderstood the concept.
AFAIK - all that happens is what you said - you spend $100k and you can deduct that against your annual tax.
He thinks its the other way around - that he bought a house for (eg) $1 million, spends $100k, so the PURCHASE price is effectively $1.1 million - so when he sells it for $1.2mm, he will only pay CGT on the $100k, not the whole $200k. I THINK thats what he is asking, but I don't think he's right
This is exactly what I originally wrote then delete because I too didn't get what the OP was trying to say.
I agree with CC that the OP wants to add the improvement costs to the purchase price to reduce capital gains. I'm also not sure if that's possible or if you just take your improvement deductions on the year. I do remember we discussed this a while ago. Anyone more skilled at searching might well find it.
I believe there is also a cap per year, is there not?
I think the cap per year is a % of the house value for ongoing maintenance of the property. I don't THINK there is a cap for renovation for a new purchase
Correct-o, that's exactly the question. Nothing to do with income tax reducing but solely with regards to capital gain tax in case of resale. This tax is quite steep, if I'm not mistaken 50% during the first 2 years and gets slowly lowered over the following years.
Since our income tax is not large anyway it would make sense for us to apply the cost of renovations toward the purchase price. I know that at least in canton Zurich it is possible. I doubt that it would necessarily automatically increase the "theoretical rental income" of the house. Doesn't that get re-evaluated only in cases of large extension projects? I mean our current "theoretical rental income" value probably assumes a kitchen in good condition, so if during the house life cycle one kitchen gets dilapidated and replaced with another it shouldn't change this value, right?
But for the purposes of adjusting the house purchase price it would make sense if it mattered. When you buy a house with an unusable kitchen you have to spend money right away to make it usable so it's effectively buying the property for a higher price.
Also, for the purposes of increasing the purchase price, will we need to declare the value-increasing expenses on some kind of a special form only when selling the property? Or with the annual tax declaration, and both issues (income tax and purchase price) are handled by the same department (tax department?) Or do we need to visit the Grundbuchamt to negotiate the puchase price increase? So many unknowns...
Ok. Well let me answer the question. No your "purchase price" does not change in relation to your improvements. It is always the price listed on the papers. The fact that they reduced the price "for the kitchen" is not relevant. The price was just reduced really based on market value or what someone was willing to pay for the house in the state it was in.
You are right the capital gains is very high in the first 5 years.
Hm, I definitely remember reading somewhere a while ago that in canton Zurich it IS possible to add value-increasing renovation costs from up to 2 years following the purchase to the original purchase price for reducing the gains tax. Do you know absolutely for sure that it is impossible, in canton Zurich?
Calling fatmanfilms or AbFab or one of the other taxophiles?
In Canton BL, we bought a house that was just refurbished. The previous owner had had the house for just six months, so no profit was permitted. He was, however, allowed to sell the house for CHF15K more than he'd paid for it, as that was the cost of refurbishment.
This is correct
A lot of this gets down to how you get the accounts written, how good your accountant is and how the (tax) person who checks your claims interprets the rules. You can creatively structure your bill to receive a tax deduction in the year you submit them or try to get them listed under capital improvements which then are added on to the purchase price in calculating capital gains tax. The downside to adding Capital Improvements is extra wealth tax, increased insurance costs and water/electricity supply charges yearly (our bill was 8k backdated to the time of purchase-ouch!!) until you sell also to get an item considered Capital it would normally need approval by the Bauamt (i.e convert a room or attic space from utilities to living). In the first couple of years there is a limitation on how much you can (tax) claim for maintenance (I am not sure of the limits per item), the theory being you bought a "cheaper house" because of the condition, thereby robbing the tax man of some CG tax so you should not benefit from a tax deduction as well. I would not do anything before consulting a good Tax accountant and getting it structured to suit your income and plans for the future.
What kind of "refurbishment" could possibly be achieved for 15k in Switzerland?
I was under the impression that you could claim upgrades on your income tax up to the total tax due for the year. And then any additional money spent, not able to be claimed against income tax, could be used as a deduction against any capital gains once the house is sold. That's why you should keep absolutely every receipt (I vaguely remember that it was the bank that told me this).
Like anything, you need to get professional advice on this stuff. Don't just take our word for it.
No. I don't know absolutely for sure what's possible or not in canton Zurich. You could do as I suggested above and try to search on here. I believe we have discussed it before. What I can tell you is how I understand it. And that is you maybe able to deduct some of the improvements from the CG. This is not the same as changing/increasing the price paid.
of course we're not talking of literally changing the price paid but changing the "money spent" on the house which the officials will subtract from the resale price to figure out the CG tax.
well looks like the best thing to do would be to go to a pro tax consultant. still it would be interesting to hear if anyone else had a similar experience...
Anything that is done to MAINTAIN the value of your property is deducted against income. This can be from buying paint, a new dishwasher, hiring a gardener or paying for a plumber to fix a leaking tap.
Anything that is done to INCREASE the value of your property should be set aside and is deducted when selling. EG If you build an extension, or a garage. Install an additional bathroom (without sacrificing useable liveable space).
If you buy for 1m - and spend 100k increasing the value - and sell for 1.2m - you'll be taxed on 100k.
Replacing dead plants is maintainance!
That's quite clear, in general terms. But what if you bought a house "as is" with a broken kitchen? Is replacing it then considered adding to the value of the house (for the purpose of gain tax reduction), or simple maintenance? And who decides that?
Actually, is it just one thing: "house value" or two separate things being tracked by the officials: 1) value as part of your capital base, insurance, etc. and 2) amount you spent on the house that gets deducted from the resale amount to figure out the gain tax?
Thanks everybody for the bits of info. The picture so far: one can either apply renovation expenses to "maintenance" or toward upping the house value but that needs to be approved by... who? the Bauamt, the tax office?
New flooring (except the kitchen), walls restored to pristine condition. The previous owners left us the remaining tiles, so when we redid the kitchen, we completed the flooring with them.
So not much. But... even so, I'm sure he did a lot of the work himself. It cost us 3K to just do the kitchen floor!
Are you sure this is true? Perhaps it's different for each canton but I've heard that stuff you do to upgrade a property which would increase it's value is also deductable against your income tax in the year you have the work done. I have one friend who spent hundreds of thousands on their renovation a few years back and basically paid no income tax for that year.
3k for a kitchen floor, labour only, sounds about right. Some of the quotes I've seen for what seemed pretty straight-forward stuff has made my eyes water. Workmanship, for the most part though, has been top class.