Income deduction for rental renovation

Greetings Mustachians,

The context: I find myself with a high marginal tax rate (49+%) and would like to find ways to reduce my tax burden. We also have a plan to invest in real estate, most likely in France, with the goal to rent it. We’d put 20% down and borrow the rest, the cash-flow from the rent would ideally cover the loan + taxes.

I heard that it’s possible to buy a piece of real estate that needs renovating, then renovate it and deduct all the expenses tied to the renovation from the income declared the year the renovation was done.

This sounds time consuming but very interesting financially.

  • Has anyone done this? If so, how was your experience?
  • Are there any gotchas with that plan?

Also I spent several evenings looking at apartment on anibis and leboncoin and found very few apartments that offer 5+% gross yield. Any tips on the kind of properties I should be looking at or places to look-into/avoid?

Cheers, -zmo

1 Like

In Switzerland, you can always deduct the expanses of renovation (unless you are adding something that is not related to energy savings etc, for example if you add a lift). I wouldn’t invest directly in RE here unless you have a competitive advantage (you are an electrician, the best negotiator, you can manage it yourself because you live nearby, you know trustworthy and cheap contractors etc).

In France, I heard that it depends of what you do. Example : you can’t deduct the new kitchen equipment. But maybe it depends if you buy “Loi Pinel”, “Loi de Normandie” or if you do “LMNP” (you know how France works I presume)

If you want to save time, have a look at the listed mutual funds that hold the buildings directly. You don’t pay wealth tax (because they do at a low rate for you) and you don’t pay income taxes on dividends (again, because they do at a low rate).

Thanks for the note.

I take it that you only own RE via ETF/mutual funds then?

My idea was that by using leverage (a loan), the tenant would sort-of pay my mortgage on the rental property and I would become owner 15-20 years later after having only put 20% down. This is an oversimplification of course, as owning RE takes a lot of time.

What kind of yield are you getting via funds? Do you have a ticker that I can take a look at?

Cheers, -zmo

we did renovate our own property and could reduce our taxable income by deducting the amount of renovations

  • List item

what is werterhaltend (= maintains the value of your property) can be deducted from tax (eg you replace your old windows)

  • List item

what is wertvermehrend (=increases the value) cannot be deducted from tax (eg you add a new sauna or swimming-pool), but you can deduct this amount and save on the Grundstückgewinnsteuer, shall you sell your flat

Whenever possible, you shall renovate every year so that you can benefit from reducing the marginal tax rate.

in our situation we asked for the support of a Tax advisor to make sure we make no mistake.
We added all documentation to our tax form (invoices etc)
Please make a lot of pictures of the property BEFORE renovating.

2 Likes

We own two buildings that we partially rent in addition to my RE mutual funds and stocks.

I think that in Switzerland you can’t have your tenants buy the house for you in 20 years, that would be impossible. In France it is difficult but possible.

The yield is not that good with the funds because of course you don’t manage it yourself and, contrary to you or a SPI company, they can’t take more than 33% debt after the first years. The secret is you can leverage more on your level with Interactive broker (I dont’ do that at the moment).

In Vaud you can either deduct the “real” renovation expenses or 20% of the income of the property (Rent + your flat theoric rent). So the best way is usually to do renovation every 3 years or so, else you are loosing that “free” deduction. Now it is different because it is 10% of the rent in new buildings and 30% in buildings older than 10 years (still 20 % for your flat) when you don’t claim real expenses deduction.

I don’t know about France but If you want to invest in Switzerland maybe buy 3 properties with maximum leverage and invest in one of them every year.

Year 1 : buy property 1 and invest in it.
Year 2 : finish to renovate property 1 early in the year.
Year 3 : Buy property 2 and renovate it. Claim 30% of property 1 rent in tax deduction.
Year 4 : finish to renovate property 2 early in the year. Claim 30% of property 1’s rent in deduction.
Year 5 : Buy property 3 etc.

Great. From what you say, it seems that there’s no limit to the amount of income deduction one can have. You could theoretically have 0 taxable income if the amount of repair/renovation is high enough.

1 Like

Thanks for the note. Yes, this sounds like a good plan, time consuming for sure.
If you don’t mind me asking, what kind of yield are you getting out of both your RE funds and RE rental property? Not sure what’s realistic around here.

We use personnaly the majority of our direct RE and the biggest part was bought by my great-great-granduncle so I can’t calculate anything

For the funds that own directly its buildings (I also have funds that owns indirectly or SPI RE companies, but those are not interesting in your situation), I am looking for 3.8% for residential and 4.2% for commercial (in NAV growth and in tax-free dividends). But if you take part in capital increase, buy when it is too low or sell when it is too high, you will get a higher yield.

In 2019-20 (bull market) :slight_smile: for a fund I bought in a swiss bank :frowning: with stamp duty :frowning: on which I paid 2 quarters of bank fees :frowning: and then a transfer fee to get out of this trap :frowning: and then I increased slightly my position at a better price :slight_smile: I have an anualised profit of 24.1% all fees considered but without considering the wealth tax deduction on the 31’st december. For an other fund I got 15.7 annualised.

1 Like

Thank you! I now know who to talk to with my RE questions :slight_smile:

By reading and partipating to this forum, you confirm you have read and agree with the disclaimer presented on http://www.mustachianpost.com/
En lisant et participant à ce forum, vous confirmez avoir lu et être d'accord avec l'avis de dégagement de responsabilité présenté sur http://www.mustachianpost.com/fr/