New: tax advantage for Geneva Owners
Certain ecological expenses now escape wealth tax
A tax advantage for Geneva owners who incur ecological expenses? Yes : the State of Geneva has just change its practice. He wants to encourage them to make their properties greener. We take stock with Maître Danilo DELGADO, lawyer and qualified tax expert, to explain to you why this is interesting to you.
However, before giving him the floor, here is the new measure in a few lines. Previously considered as investments with added value, these “ecological” expenses will now be classified in the category of maintenance costs. Concretely, this means that they will be deductible from taxable income and that the tax value of the property will not be increased, so that the wealth tax will not increase either.
What is an « ecological” expense?
In this case, it is an expense intended to save energy and protect the environment.
Background
Switzerland is aiming for carbon neutrality in 2050, also called the “net zero challenge”. The aim is to contribute to international efforts to limit global warming to a maximum of 1.5°C compared to the pre-industrial era. According to official statistics, more than 40% of energy consumption and 1/3 of climate-damaging CO2 emissions are attributable to the building sector in Switzerland.
The Confederation and the cantons are therefore committed to finding effective solutions.
We can see in this Geneva tax change a desire to encourage owners to make changes now. We must nevertheless keep in mind the fact that this work will eventually become obligatory (i.e. 2030-2050), under the Energy Master Plan.
Here are some examples of « ecological » expenses now considered as maintenance costs* :
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- Replacing an old boiler (oil/gas) with non-fossil energy (heat pump, thermal network, biomass)
- The installation of window frames with insulating glazing (double or triple) instead of single glazing.
On the income tax side, it is always possible to deduct, in accordance with the law, ecological expenses from your taxable income. It is even possible to benefit, if necessary from deductibility spread over time (but at most during the two tax periods following that of invoicing of these investments). This measure now applies to all taxes still in progress, regardless of the tax period concerned. On the other hand, taxes already in force cannot be modified (case law provides that a change in practive is not a reason for reviewing a decision that has entered into force).
« The increase in the tax value could represent a brake on certain ecological expenses and I am delighted that this is no longer the case, », notes Nathalie Fontanet, State Councilor in charge of the Department of Finance and Human Resources. The latter immediately announces that other tax adaptations of the same type should see the light of day very soon.
To be followed closely……
Tax advantage for Geneva owners: when is it really interesting?
We can only rejoice at this encouragement.
However, we still asked ourselves questions. If these expenses are no longer considered for tax purposes as capital gains investments, then they will no longer be deductible from the tax on real estate profits and gains (IBGI) when the property is sold.
Therefore, what is the financial impact of this new measure in the event of resale? Is there a better time to incur these costs?
To see more clearly, we turned to Maître Danilo DELGADO, lawyer and qualified tax expert, partner at the Junod, Muhlstein, Lévy & Puder firm in Geneva.
The length of ownership of the property obviously enters into the weighing of interests, since the tax rate gradually decreases over time. We thus go from 50% tax on capital gains (if we resell with 2 years of its purchase) to 0% after 25 years of ownership (see our article on IBGI).
The other parameter to consider is the income tax rate which varies significantly from one owner (natural person**) to another.
Example 1: You have owned your home for over 25 years, and you are considering selling it now
Investing and changing (for example) your oil boiler for a heat pump before reselling, is it a good financial transaction.
Good news: this expense is now deductible from your income. It will therefore reduce the effect of your rental value. It could even cancel it if the investment in question in higher than your rental value, Maître Delgado tells us. This in itself is already advantageous.
Your real estate agent sees another positive point: by carrying out this work, you add value to your house in the eyes of the buyer and their bank. You should therefore be able to sell at a higher price, and make a better profit, which will not be taxed! In fact, your ownership period exceeds 25 years and your capital gains tax rate, upon sale, is 0%.
This new measure is fiscally very advantageous in this case, both from the point of view of income tax and capital gains tax. Now is the right time to undertake such work.
Example 2 : You have owned your house for 5 years, and you are considering selling it now
In this case too, such work presents a tax advantage. It is less marked than in the first example, because this time your profit on the real estate gain is taxed (30% for a period of ownership between 4 and 6 years). It may be interesting to call on a tax professional to assess the real impact of this expense on the taxation of your income.
Generally speaking, keep in mind that a house will sell better, that is to say faster and at a better price if it has benefited from work and in particular work covered by this ecological measure.
It therefore remains interesting to incur this expense which you can immediately deduct from your income tax while increasing the profit made in the event of a sale.
In the examples cited (changing the boiler or glazing), this work will also have another immediate positive effect (apart from any overall ecological aspect): that of reducing your heating costs.
Maître Danilo DELGADO observes that it is generally appreciable to be able to make a tax deduction streaight away rather than applying it later (within the framework of the IBGI) at a rate generally lower than that applicable to taxable income.
A Geneva tax exception
Especially since, underlines our tax expert, the canton of Geneva presents a very advantageous Swiss exception for its owners, and this might not last! Namely a capital gains tax rate of 0% after 25 years of ownership. The other cantons do not offer this advantage: they all retain a residual tax rate (for example: the minimum rate is 7% in the canton of Vaud, from 24 years of ownership).
However, we cannot exclude, warns us Maître Danilo DELGADO, that the State of Geneva will eventually modify its legislation and realign itself with neighbouring cantonal practices by also establishing a residual tax rate. Although not materialized to date because it depends on other tax reforms at the federal level (rental value), the idea has already travelled through the cantonal hemicycle on various occasions.
Our Advice
If you are an owner, and especially if you have been for more than 25 years, it is interesting to take advantage now of the advantages that the current market offers you:
- New tax advantages allowing you to reduce your income tax and realize a better tax-free capital gain.
- Very high prices
Be careful, however: if sale prices in Geneva have followed a constant progression for several years, the start of an increase in mortgage rates could modify this upward curve. If you’re thinking about selling, now is the right time.
Contact us for a free estimate and personalized support
*For an exhaustive list of these expenses, see Notice 1/2022 – Deductibility of maintenance costs for private buildings | ge.ch
**Obviously, we are talking here about natural persons and not legal entities (companies) who are not considered “professionals” from a tax perspective. Indeed, for companies and people considered “professional”, the taxation is completely different.
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