Hello, I can hear every now and again that having a mortgage (and keep the money) is tax beneficial as opposed to buying a property. Can anyone explain me why?
Out of curiosity I have played with VaudTax software.
Scenario 1: 400k on a bank account
Scenario 2: 0 on bak accunt but 400k worth property
Scenario 3: 300k on a bank account, 400k worth property, 300k debt
Guess what, the final tax is basically the same! I really don't see any great benefit of not using your money to buy a property, unless you are a financial shark and can use the money for lucrative investment. However there seems to be no tax benefit.
Further question:
I have heard many times about the 'hypothetical renting income'. In the Vaud tax I selected this would be my primary residence. Then the software calculated ~6k income in the property summary, but the final tax calculation added just ~3k to my overall income so the final tax almost didn't change. Normally one would pay ~1.2k * 12 to rent such property so it feels like the 'hypothetical renting income' is a nonexistent problem as we are talking about few hundreds max vs ~15k
Do us a favour and write a short precis rather than just a youtube link, eh? Just a sentence would do, to highlight whatever point the video is making and help readers know if they want to waste their time viewing it or not.
As it was I closed it almost immediately seeing that it was from someone in Ottowa. What relevance Canadian economics might have on Swiss mortgages I do not know, but very little, is what I suspect.
I read it as having a 400k cash means 400k to wealth tax, but having a 400k property (which tax value would be 150k) means 250k in wealth tax savings, but now if we take the scenario "100k down payment, 300k debt" assuming 150k tax value the debt exceeds the wealth by 150k... but again if we put all 400k in the property than the wealth tax would be from 150k giving you 300k margin... yeah, I also don't get it
Edit:
I'm slow thinking sometimes, but I think the advantage is then on the opposite side, when you put all 400k in a property than you're taxed on 150k... so, well, exactly the opposite of the tribal knowledge passed by mouth to mouth by all expats
Edit2:
OK, got it, there is no tax advantage in the situation I was viewing, i.e. if you want the property. However let's assume you have 2 milions, what can you do to lower your tax? buy a 2 milions worth property on mortgage, rent it even without any benefit, than sell in the future, but in between your wealth tax is zero.
Yeah, that doesn't really confirm any tax advantages Of course if you are a financial shark, go on take as much "cheap" loans as you can, invest the money to repay the loans and gain on top of it.
It's really funny how ingrained in society this belief is. The majority of people will tell you that you can save taxes by deducting your mortgage interest payments but many will forget the fact that you are paying those very interests to the bank.
That said, property costs a lot these days around here and mortgage rates are really low, so it makes indeed sense to invest the money somewhere else to get returns higher than the mortgage interests. Of course this comes at a somewhat higher risk.
The point, as I always understood it, is that you're taxed on the theoretical rental income anyway, whether you have a mortgage or not, whether you rent it out or not. If you don't have a mortgage then you simply pay the tax; if you do then that's roughly offset by the amount of the interest payments, i.e. you pay tax only on the difference between the rental income and the interest payments you've made.
Whether it works out in practice, particularly wrt wealth tax as in the scenarios mentioned here, I don't know, and confess that it all get a bit beyond me, but I do know that when we've been taking out mortgages the 'engrained belief' is stated as such by banks and estate agents, and when we've asked our accountant(s) in very broad terms they also support the idea that a mortgage up to a particular proportion is indeed most tax efficient.
It's usually suggested that 65% of the value is the break-even point (the maximum gain), but I've heard it said that this will vary significantly depending in individual circumstances; again, it all goes a but over my head.
I really would like if one of the financial whizzes here could explain it in terms we could all understand.
It makes absolutely no difference to wealth tax, your net wealth is the same.
You have a pot A with money and a pot B with (negative) mortgage and a taxable value of the property C. Your wealth A + B + C does not change just by moving balance between A and B; C is (almost) fixed.
It makes a small difference to income tax, since you are paying interest which you can deduct. BUT as already stated you never save more tax than the interest you pay, so this is also not a net gain.
The question for a mortgage is:
- can you afford not to have one
- can you do something better with the money vs the interest rate on the mortgage
The answer to the first is typically no. The answer to the second is typically yes as mortgages have a low interest rate.
Thank you all for your contribution! I appreciate it.
I the view of this, the tribal wisdom 'it is beneficial to get mortgage in Switzerland' should be passed on more precisely as:
- mortgage in Switzerland is of a less burden as in Elbonia because in Switzerland you can deduct interest paid from your income on your tax return, whilst in Elbonian states you can't do this
- if you have the money to buy without a mortgage there's no magic benefit, much as everywhere, as usual mortgage adds some cost*
Your last statement is only true if you have no other debts, since a mortgage is almost certainly the cheapest way to borrow. That probably includes mortgages in any other country as well - Switzerland rates are low by global standards, particularly for long-term fixed rates.
Easy explanation with a slightly different example: making donations is tax beneficial. You donate 1'000chf you can deduct 1'000 from taxable income therefore reducing your tax charge. Assuming you have a 30% tax rate you can save 300chf on tax, and it only costs you 1'000 in donations to do so!
Currently with mortgage interest below 1%, there is little claim back!
As Newtoswitz pointed out having property or not having property makes not difference to wealth tax, as the money you put into the property was always there taxed (if enough) as investments/cash under the mattress or in a house/flat.
It is beneficial to have as big a mortgage as possible because it's dirt cheap and allows you to keep some of your own cash to invest...